As the European Union pushes forward with its integration and reform agenda, one word has become the new mantra among policymakers — “simplification.” Inspired by recommendations from former Italian prime ministers Mario Draghi and Enrico Letta, the EU aims to streamline its complex web of financial and market regulations. Yet experts warn that unless this process delivers genuine clarity, the results may fall short of what Europe’s economy truly needs.
The Challenge of Simplifying Without Deregulating
EU officials insist that simplifying regulations does not mean deregulating. Several working groups have been established to propose reforms that could make Europe’s legislative framework more efficient. However, progress so far has been limited. The real issue, analysts argue, is not the number of rules — but how unclear and inconsistently applied they are across member states.
This ambiguity allows for varying interpretations among national regulators and even within EU institutions themselves, creating friction in the broader goal of building a fully integrated market for savings and investment.
The Case of Securitisation: A Missed Opportunity
A key example of how unclear rules hinder financial progress lies in Europe’s underdeveloped securitisation market — the practice of bundling loans and selling them to investors. This mechanism, widely used in the United States, allows banks to free up capital and issue new loans, particularly to small and medium-sized enterprises (SMEs) that form the backbone of the European economy.
However, in Europe, securitisation remains marginal. The reason, experts say, is the regulatory uncertainty surrounding how banks must meet the so-called Risk Retention Requirement — the rule that lenders keep a portion of the risk to align their interests with investors.
The regulation fails to clearly define how to calculate the revenues tied to the retained risk, leaving banks unsure about how much exposure they must maintain. In the absence of clarity, the European Central Bank (ECB) has adopted a conservative interpretation, making securitisation far more costly for European banks compared to competitors in the U.S. and the U.K.
A Contradiction in Policy
This has created what many see as a policy paradox. While the ECB publicly supports developing Europe’s capital markets, its strict regulatory stance effectively discourages their growth. The consequences are twofold:
- Reduced lending capacity for European banks, particularly affecting SMEs that rely on bank financing.
- A competitive edge for foreign financial institutions, notably U.S. private debt funds, which face fewer regulatory burdens in Europe’s emerging credit market.
As a result, European companies are finding it harder to secure financing, while unregulated non-bank entities are gaining ground — potentially introducing new risks into the system.
A Call for Regulatory Clarity
The current situation demonstrates how well-intentioned rules can yield unintended consequences. Overly bureaucratic and inconsistently applied regulations are leaving Europe’s real economy short of capital, while inadvertently boosting foreign competitors and shadow banking.
What Europe truly needs, experts emphasize, is not a lighter regulatory touch but a clearer and more coherent framework. By ensuring consistent application and reducing discretion in interpretation, policymakers can help regulators, banks, and investors operate with greater confidence and efficiency.
Only through clarity, coherence, and consistency — not endless layers of “simplification” — can Europe finally build a unified, dynamic financial market capable of supporting its economic ambitions.
