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Banking regulation

The EU banking framework applies to all banks, other credit institutions and investment firms operating within the EU. Its aim is to ensure stability and integrity while maintaining public confidence in the financial system.

The objectives of the EU banking framework

Protect depositors

Safeguarding depositors’ funds by maintaining well-capitalised banks capable of withstanding financial shocks.

Prevent systemic risks

Mitigating risks that could lead to financial crises and destabilise the economy.

Harmonise standards

Establishing uniform rules to create a level playing field and promote fair competition among credit institutions.

Enhance resilience and transparency

Strengthening overall stability and clarity in order to build trust and ensure long-term sustainability.

Key legal instruments

The EU has adopted legal instruments on various aspects of the banking sector. Here is a summary of the main pieces of legislation.

Capital requirements regulation and directive

The capital requirements regulation (CRR) and capital requirements directive (CRD) set out detailed prudential requirements for, inter alia, capital adequacy, liquidity, leverage, risk management and supervision.

These rules ensure that banks hold sufficient capital and liquidity to mitigate risks and absorb potential losses.

Deposit guarantee schemes directive

The deposit guarantee schemes (DGS) directive protects depositors in each member state by guaranteeing reimbursement of deposits up to €100 000 if a bank fails. The directive also sets rules for national deposit guarantee schemes, including coverage limits, funding and payout procedures.

All banks must participate in these schemes.

Member banks make contributions based on their risk profile and other factors. The guarantee scheme places all the contributions in a fund. When a bank fails and deposits become unavailable, the guarantee schemes must be in a position to reimburse depositors holding any type of deposit protected under the directive.

Bank recovery and resolution directive

The bank recovery and resolution directive (BRRD) establishes a framework for the orderly recovery and resolution of failing banks, to minimise the impact on the economy and to remove the need for taxpayer-funded bailouts.

The directive:

  • ensures that failing banks are managed effectively through resolution planning and crisis protocols
  • prevents the need for recourse to taxpayers in the event of bank failures by introducing a bail-in mechanism (shareholders and creditors must bear the costs where the bank fails)
  • establishes resolution funds, financed by the banking sector, to provide support for the resolution of failing banks if needed

Single supervisory mechanism regulation

The single supervisory mechanism (SSM) regulation defines the framework for the European Central Bank’s (ECB) role in supervising significant banks in the banking union.

The SSM outlines the ECB’s supervisory responsibilities and its collaboration with national competent authorities.

Single resolution mechanism regulation

The single resolution mechanism (SRM) regulation provides the framework for the Single Resolution Board (SRB)’s role in the resolution of failing banks within the banking union.

The SRM regulation defines the powers of the SRB as regards resolution planning, its decision-making processes and the use of the single resolution fund.

Basel III standards

The Basel III standards are a set of international banking regulations developed by the Basel Committee on Banking Supervision to strengthen bank capital requirements by increasing liquidity and decreasing bank leverage.

These standards have been integrated into the EU's regulatory framework through amendments to the CRR and the CRD.

Compared to Basel II, Basel III adds a number of key provisions whereby:

  • banks must hold more capital to cover potential losses, ensuring greater stability during financial downturns
  • banks are required to maintain a sufficient amount of high-quality liquid assets to survive a 30-day stress scenario (liquidity coverage ratio)
  • banks must have stable funding sources to support their operations over a one-year time horizon (net stable funding ratio)
  • a non-risk-based measure is implemented to limit the build-up of excessive leverage in the banking sector (leverage ratio)
  • improved risk management practices and more rigorous stress testing ensure that banks can withstand economic shocks effectively

The Council adopted the Basel III implementation legislative package on 30 May 2024. The new rules came into force on 1 January 2025, with some requirements subject to a multi-year phase-in period.

Roles of the EU institutions

The EU banking framework involves several key institutions, each playing a distinct role in maintaining financial stability.

The European Central Bank is the main supervisor of significant banks in the euro area under the single supervisory mechanism. It ensures that these banks comply with prudential requirements.

The Single Resolution Board is responsible for planning and managing the resolution of failing banks under the single resolution mechanism. Its work is supported by the single resolution fund.

The European Banking Authority (EBA) promotes effective and consistent prudential regulation and supervision across the EU. It develops technical standards and guidelines to harmonise regulatory practices.

The national competent authorities (NCAs) supervise smaller banks and implement EU regulations at the national level, complementing the work of the ECB and EBA.

Latest and ongoing developments

The EU banking framework continues to adapt and evolve in response to global economic shifts, technological advancements and sustainability priorities. This work aims to bolster the resilience of the financial system, while fostering innovation and ensuring consumer protection.

Digital finance package

In response to the rapid rise of digital finance, the EU is developing a comprehensive regulatory framework to address the challenges posed by cryptocurrencies, fintech innovations and digital payment systems.

Sustainable finance

The integration of environmental, social and governance (ESG) rating activities into banking regulation is a priority for the EU. On 19 November, the Council adopted new rules aimed at making rating activities in the EU more consistent, transparent and comparable in order to boost investors’ confidence in sustainable financial products.

The European Securities and Markets Authority (ESMA) will authorise and supervise ESG rating providers operating in the EU, ensuring that they adhere to transparency standards.

Anti-money laundering

To address emerging risks and combat financial crime, the EU is enhancing its anti-money laundering framework (AML). This includes tighter controls, increased transparency in financial transactions and greater cooperation between national and EU authorities.

The establishment of a new EU anti-money laundering authority (AMLA) will play a central role in monitoring compliance and ensuring the uniform application of anti-money laundering rules across member states.

Crisis management and deposit insurance review

In recent years, member state authorities have often sought solutions outside the EU framework when medium-sized and smaller banks have failed in the EU. This has on occasion led to taxpayers' money being used to support failing banks, instead of the bank's required internal resources or private, industry-funded safety nets, as intended by the EU bank resolution framework.

In response to this situation, in April 2023, the Commission proposed a reform of the crisis management and deposit insurance (CMDI) framework. On 19 May 2024, the Council agreed on its position on the framework by adopting a negotiating mandate. On 25 June 2025, the Council and the European Parliament reached agreement on the review, marking another step towards completing the EU’s banking union.

The reform package includes legislative proposals that would amend the bank recovery and resolution directive, the single resolution mechanism regulation and the deposit guarantee schemes directive. The review aims to bridge the funding gap by giving small and medium-sized banks access to industry-funded safety nets as an additional resolution-financing tool and to reduce reliance on bail-ins of uninsured depositors.

Daisy chains

On 26 March 2024 , the Council adopted the so-called ‘daisy chains’ directive as part of the reform of the CMDI framework. The directive amends the BRRD and the SRMR. It introduces a set of targeted adjustments that will play an important role in improving the framework’s proportionality.

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Last review: 25 June 2025