According to an industry lobbying group, the EU's failure to break down financial barriers between member state banking markets could result in major lending institutions having approximately €225 billion (about $262.5 billion) in capital that remains trapped, much of which could otherwise be used to support other financial operations. This latest development represents a significant negative impact on European bank stocks' largest rally in 16 years, potentially creating major upward resistance for European banking shares that have been surging since April.
The Association for Financial Markets in Europe (AFME) stated in a report released Tuesday that large European commercial banks with assets exceeding €500 billion maintain capital ratios at their cross-border EU subsidiary level that are "consistently higher" than on a consolidated basis, meaning these banks' cross-border subsidiaries maintain capital ratios that are "persistently above" consolidated capital ratios.
Following the 2008 financial crisis, European banking markets became fragmented along national lines as regulators in EU member states sought to prioritize protecting domestic depositors when foreign-registered banks encountered difficulties. Politicians later implemented measures to create a so-called banking union, but major lending institutions indicate that the firewalls still in place within this "fragmented" EU banking union continue to burden them, particularly regarding cross-border mergers and acquisitions.
AFME's report shows that "the largest EU banks face capital requirements at their cross-border subsidiaries in other countries that exceed consolidated requirements." AFME stated in the report that "persistent trust deficits between regulators in different member states" have hindered changes to EU banking benchmark rules, preventing the allowance of so-called capital mobility exemptions.
The lobbying group suggests that regulatory authorities should recognize the progress made over the past decade in resolving failed or bankrupt banks and strengthening lending institutions' balance sheets. AFME indicated that the EU imposes higher equity and debt requirements for total loss-absorbing capacity on commercial banks compared to their counterparts in the US and UK, adding that the related additional financing costs represent a severe competitive disadvantage.
Some European banks have recently shown increased interest in acquiring competitors or individual business units. However, AFME notes that approval processes across major EU member states remain "cumbersome."
AFME's calculation of so-called "trapped capital" builds upon previous estimates by the European Central Bank. The ECB's earlier calculations showed that local regulatory rules prevented approximately €250 billion in liquid assets from flowing freely within the EU banking union.
AFME's latest research emerges as European bank stocks achieve their strongest bull market trajectory in over a decade. However, the strongest European bank rally in 16 years faces a series of major challenges, including AFME's calculation of approximately €225 billion (about $262.5 billion) in trapped capital, as well as French political instability, renewed calls for windfall taxes in the UK, and the possibility of additional taxes in Italy.
Year-to-date in 2025, European bank indices have surged 41%, easily leading all regional stock market sectors, benefiting from impressive earnings performance and robust investment returns. According to Bloomberg Intelligence data, MSCI Europe Financial Index constituents significantly exceeded analyst expectations in the second quarter, with earnings per share growing 15%, far surpassing the market's original expectation of just 2% growth.
Optimistic strategists generally believe that despite European bank stocks experiencing three consecutive years of strong gains, this rally is far from overheated, with European banking indices still approximately 45% below their pre-2007 global financial crisis peaks.