European Commission calls for review of banking regulation burden – implications for Latvia

The European Commission has published an assessment of EU banking competitiveness, emphasizing that while the banking system has become significantly more resilient over the past 15 years, regulatory burden and diverging implementation practices impede efficient capital flows to productive investments.

The Commission calls for analyzing not only individual requirements but their cumulative impact on banks' costs, profitability, and lending capacity. Despite high capital and liquidity ratios, European bank stocks underperform US peers, indicating investor caution about long-term profitability.

A key issue is regulatory layering – different supervisory practices across member states and additional national requirements increase operational costs and hinder cross-border services. The Commission notes that the single banking market's potential remains underutilized.

For Latvia, this discussion is particularly relevant. In a small, open economy, any additional requirement has a larger relative impact. Latvia should regularly assess whether national regulations, taxes, and levies – such as the solidarity contribution and financial stability fee – foster lending and investment in the long term or merely increase capital costs.

The Commission also highlights the need to develop capital markets, including through the Savings and Investment Union, which could encourage long-term savings and diversify funding sources. However, banks will remain crucial, especially for SME financing.

Overall, the report is not a call to weaken regulation, but to assess whether accumulated requirements still effectively achieve goals without creating unnecessary barriers to growth. For Latvia, it is an opportunity to use the Commission's findings to purposefully improve economic policy and enhance competitiveness.