Europe weighs bank rule changes as Wall Street profits surge

European bank stocks are getting a fresh policy catalyst as Brussels considers easing parts of the rulebook that has kept lenders more constrained than their U.S. rivals. For everyday investors, the question is whether lower regulatory costs could help European banks earn stronger returns and compete more directly with Wall Street.

The European Commission is expected to publish a report Friday on banking competitiveness, CNBC reported. The package will outline possible legislative changes for the sector for 2027, with Brussels looking for ways to lift European banks that have trailed larger U.S. institutions in trading, investment banking and capital markets.

According to CNBC, the Commission is considering a deregulatory push that could reduce capital burdens, make bank balance sheets more flexible and support cross-border mergers. A bank’s balance sheet is the snapshot of what it owns, owes and funds with shareholder capital. When regulators require banks to hold more capital, banks have a bigger safety cushion, but less room to use that capital for lending, trading or deal financing.

What Brussels may change

The Financial Times reported that the Commission is preparing to remove parts of its “Pillar 2” leverage-ratio rules. A leverage ratio measures a bank’s capital against its total exposure, without adjusting for how risky each asset is. The EU’s baseline leverage ratio is 3%, and Pillar 2 rules allow national supervisors to add extra requirements on top.

A draft also includes steps to reduce additional capital buffers, cut reporting demands for lenders and provide more detail on a common European Deposit and Insurance Scheme, according to the Financial Times. Deposit insurance protects customers’ deposits if a bank fails. A shared European system could make it easier for banks to operate across borders because depositors would receive more equal protection across the bloc.

Jakub Lichwa, a member of the multi-sector bond portfolio management team at TwentyFour Asset Management, told CNBC that European authorities are paying attention to regulatory changes in the U.K. and the U.S. and do not want local banks put at a disadvantage.

Lichwa said lower capital requirements can help banks produce higher return on equity, a measure of profit compared with shareholder capital. He added that lighter capital rules do not automatically improve how banks operate, but could help them compete more effectively with global peers.

Wall Street sets the benchmark

The timing is hard to miss. CNBC reported that JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs all beat expectations in the second quarter, helped by strong trading revenue and a recovery in dealmaking.

European banks now face their own earnings tests. Santander, UniCredit, UBS and Deutsche Bank are scheduled to report later this month, CNBC reported.

Andrew Stimpson, head of European banks research at KBW, told CNBC that Europe has recognized it is competing globally and that efforts focused only on simplifying bank rules are unlikely to meet its strategic goals.

Stimpson pointed to Europe’s need to finance defense, artificial intelligence infrastructure and energy infrastructure, all of which require large amounts of capital. He said the Friday report is likely to address deregulation as well as legal and rule changes that could make cross-border consolidation more likely.

Cross-border consolidation means mergers between banks based in different countries. Supporters argue it could create European lenders with enough size to compete with U.S. banks. The European Central Bank has backed the goal of a more unified banking market, where capital and liquidity can move more freely inside cross-border banking groups.

Political resistance remains a major hurdle. UniCredit’s effort to build a controlling stake in Commerzbank has faced legal and political opposition in Germany, where the federal government is the German lender’s second-largest shareholder, CNBC reported.

Caroline Liesegang, head of capital and risk management at the Association for Financial Markets in Europe, told CNBC that fragmentation, trapped capital and liquidity, and regulatory complexity still limit banks’ ability to support investment across Europe’s single market. She said legislative proposals expected in early 2027 are a key chance to improve the competitiveness of the EU banking sector.

This story draws on original reporting from CNBC.