EU Banking Union 2026: EDIS Deadlock and the Cross-Border Consolidation Wave

Two Pillars Up, One Pillar Stuck #

The Banking Union was designed in three pillars after the 2012 euro area sovereign debt crisis. Pillar one, the Single Supervisory Mechanism, transferred direct prudential oversight to the European Central Bank on November 4, 2014. The SSM today supervises 113 banking groups directly, covering roughly 82 percent of euro area banking assets. Pillar two, the Single Resolution Mechanism, became fully operational on January 1, 2016. The Single Resolution Board writes resolution plans for those 113 institutions and the Single Resolution Fund is funded by ex-ante contributions calibrated to reach 1 percent of covered deposits.

The SRF reached its target in July 2024 at approximately 78 billion euros, on schedule. The Common Backstop, an ESM credit line of up to 68 billion euros that doubles the firepower available in resolution, was signed in January 2021. Ratification is complete in all member states except Italy, where the Meloni government has not advanced the law since taking office in October 2022. Without Italian ratification the backstop cannot be activated. ECB Banking Supervision and the SRB have flagged this gap publicly, including in the SRB Annual Report and in outgoing remarks by then SSM Chair Andrea Enria at year-end 2023.

Pillar three, EDIS, is the missing piece. The Commission proposed a phased scheme in November 2015 starting with reinsurance, moving to coinsurance, and ending with full mutualisation by 2024. The proposal stalled. A second hybrid model in October 2017 dropped full mutualisation. The Banking Package adopted in April 2024 covered the Crisis Management and Deposit Insurance review and tightened the bail-in tool for medium sized banks, but it did not advance EDIS. German positioning, articulated by the CDU and CSU under the prior coalition and continued under the new CDU-led federal government, ties any move on EDIS to prior reduction of legacy non-performing loans and sovereign concentration in periphery banks. That precondition has been the formal European Council line since the 2016 Bratislava roadmap.

Capital Is Adequate, Cross-Border Lending Is Not #

On capital the system is in better shape than at any point since the Banking Union began. The 2023 EU-wide EBA stress test on 70 banks produced a CET1 depletion of 459 basis points in the adverse scenario over three years. The 2024 ECB SSM cyclical exercise, run on 96 supervised banks under a more severe geopolitical and energy shock, produced a CET1 depletion of approximately 370 basis points and a starting CET1 of 15.1 percent. Italian banks, the historical worry, were among the more resilient outliers, reflecting the run-down of legacy NPLs from the 17 percent peak in 2015 to roughly 2.3 percent system-wide by mid 2024. The next EBA test publishes in 2026.

Profitability has normalised. Aggregate ROE for SSM banks rose from a pre-pandemic 5 to 6 percent to approximately 10 percent in 2023 and held in a 9 to 12 percent range through 2024 as the ECB raised the deposit facility rate from minus 0.5 percent in July 2022 to 4.0 percent by September 2023. With the rate cut to 2.5 percent by January 2026 the NIM tailwind has faded, and consensus sees ROE drifting toward 9 percent in 2026.

What the system has not produced is cross-border lending. Of the roughly 28 trillion euros of euro area bank assets, the share lent across borders is broadly unchanged from the 2014 Banking Union start. ECB integration indicators show retail bank market integration well below the 2007 pre-crisis peak. Danmarks Nationalbank and ECB staff work, and the Letta and Draghi reports of 2024, place the implicit cost of fragmentation at roughly 30 basis points of additional spread on bank funding for non-core sovereigns. The structural diagnosis has been clear for a decade. The fix has not arrived.

UniCredit, Commerzbank, and the German Veto #

On September 11, 2024 the German finance agency placed a roughly 4.5 percent block of Commerzbank shares with UniCredit through an accelerated bookbuild that took UniCredit's holding to 9.0 percent. On September 23, 2024 UniCredit disclosed it had built up to roughly 21.0 percent of Commerzbank economic exposure, of which approximately 11.5 percent in physical shares and the rest through total return swaps, and notified the ECB to authorise an increase up to 29.9 percent. The federal government under Chancellor Olaf Scholz called the build-up unfriendly, finance minister Christian Lindner rejected a takeover, and Commerzbank's supervisory board, works council, and the Verdi union opposed it.

UniCredit opened a parallel front in Italy. On November 11, 2024 it launched an all-share exchange offer for Banco BPM at 6.657 euros per share, valuing BPM at approximately 10.1 billion euros. The Italian government invoked the national golden power regime in April 2025, attaching conditions on lending and on the Russia exposure of UniCredit's subsidiary AO UniCredit Bank. CONSOB cleared the prospectus, but UniCredit withdrew the offer on July 22, 2025 citing the conditions as a material constraint. By early 2026 UniCredit's Commerzbank economic stake stood near the 29.9 percent ECB-authorised ceiling, with no formal merger offer launched, and the new federal coalition under CDU leader Friedrich Merz publicly cool to a takeover.

The episode is the cleanest test of whether the Banking Union actually permits cross-border consolidation. The SSM has authorised the holding. Free movement of capital is a Treaty freedom. Golden power regimes, originally calibrated for defence and energy, have been extended to systemically important banks and used to block transactions. The Banking Union supervises a single market in solvency but national governments retain a de facto veto on ownership. That is the binding constraint, not capital, not liquidity, and not EDIS.

BBVA and Sabadell: The Hostile Bid That Cleared Brussels and Lost Madrid #

BBVA announced an unsolicited share-exchange offer for Banco Sabadell on May 9, 2024 after Sabadell's board rejected a friendly approach on May 6, valuing Sabadell at approximately 12.2 billion euros at announcement. The offer ratio was 1 new BBVA share for every 4.83 Sabadell shares. The Spanish government, through Economy Minister Carlos Cuerpo, opposed the deal on competition and territorial grounds, citing concentration of SME lending in Catalonia. The CNMC opened a phase two review in November 2024.

The transaction nonetheless cleared the regulatory gauntlet. The ECB authorised the change of control in September 2024 under the SSM qualifying holding regime. The CNMV approved the offer prospectus on September 5, 2025 after the CNMC issued conditional clearance with behavioural remedies on June 30, 2025. The Spanish Council of Ministers then added public-interest conditions, including a three-year prohibition on legal merger and on closing Sabadell branches in certain regions. The offer settled in late 2025, with BBVA reporting acceptance from holders representing more than 50 percent of Sabadell capital. Full legal merger is therefore deferred until 2028 at the earliest.

Two lessons. First, a hostile transaction inside the Banking Union is feasible when the acquirer and target share a domestic regulator and capital is accretive. The deal cleared. Second, finance ministry intervention in the structure of approved deals is now the norm. The outcome resembles what Italian golden power produced for UniCredit on Banco BPM and what the German finance ministry signalled for Commerzbank. The pattern is consistent across three jurisdictions and three governments of different political orientations.

Where the Pipeline Goes Next #

Three structural pressures push more deals into the pipeline through 2027. First, scale: the top six SSM banks hold roughly 60 percent of supervised assets, but the next tier is sub-scale in cards, custody, payments, and digital infrastructure relative to BNP Paribas, Santander, ING, and US franchises. Second, profitability has peaked: the deposit beta lag closes in 2026 and ROE drifts toward 9 percent on consensus. Third, the savings flow problem identified in the Letta report of April 2024 and the Draghi report of September 2024 will not solve itself. European household savings of roughly 35 trillion euros are intermediated overwhelmingly through deposits and life insurance, and the Commission's Savings and Investments Union package proposed in March 2025 will not change that mix without a deeper bank and asset-management complex.

On the supervisory side SSM Chair Claudia Buch, in role since January 1, 2024, has signalled openness to cross-border deals, conditional on integration plans, governance, and IT consolidation timelines that boards have historically underestimated. The SSM Supervisory Priorities 2025 to 2027 frame fragmented retail banking as a financial stability concern. The SRB under Dominique Laboureix has aligned, with resolution plans for cross-border groups built around the Single Point of Entry model.

On the political side the picture is harder. The CDU-led federal government in Berlin, the Meloni government in Rome, and the Sánchez government in Madrid have each used national tools to shape outcomes. Until the Council either codifies a narrow, time-bound public-interest test for in-scope bank transactions or constrains the use of golden power for SSM-supervised institutions, every cross-border deal will need to negotiate an unwritten national-interest review on top of the Banking Union review. That uncertainty is itself the price.

What Sovereign Creditors, Asset Managers, Regulators, and Banks Should Price #

For sovereign creditors the relevant signal is the persistence, not the level, of the fragmentation premium. Without EDIS and without an unconstrained cross-border M&A regime, periphery sovereign and bank funding will continue to embed roughly 30 basis points of integration discount in calm conditions, widening sharply in stress. Italian and Spanish bank senior preferred and senior non-preferred should be expected to trade with that risk in the basis. Italian ratification of the Common Backstop is a one-line step that would compress that basis, and its absence is informative.

For asset managers the question is whether the next round produces investable scale. UniCredit's Commerzbank position is a real option that has not been exercised. BBVA on Sabadell delivers scale subject to a three-year structural lock. Crédit Agricole's posture in Banco BPM is patient. Strategic positioning requires a view on whether the Council moves on EDIS or on golden power before 2028, and on neither is consensus convinced. The base case remains slow.

For regulators the priority is sequencing. The Banking Package adopted in April 2024 closed several gaps in CMDI and tightened MREL on smaller institutions, but it left EDIS untouched and did not address the national golden power overlay. A narrow, EU-level public-interest review for SSM-supervised cross-border transactions, time-bound and reviewable, would do more for integration than another round of EDIS proposals that lack a Council majority. For supervised banks the implication is that the next twelve to twenty-four months are the window. Capital is in surplus, profitability is at its post-rate-cycle peak, and boards that want to move should treat the political reality as a known constraint to be negotiated, not as a reason to wait for a Banking Union that completes only on paper.

Sources #

• ECB Banking Supervision, Annual Report 2024 and List of Supervised Entities
• Single Resolution Board, Annual Report 2024 and Single Resolution Fund tracker
• European Commission, Banking Package 2024 and CMDI review factsheet
• European Commission, EDIS proposal of November 24, 2015 and 2017 hybrid model communication
• European Banking Authority, 2023 EU-wide Stress Test results
• ECB, 2024 SSM cyclical stress test results
• European Stability Mechanism, Common Backstop ratification tracker
• UniCredit S.p.A., investor disclosures on Commerzbank and Banco BPM
• BBVA, tender offer documents and CNMV approval for Banco Sabadell
• Reuters coverage of UniCredit-Commerzbank, UniCredit-Banco BPM, and BBVA-Sabadell
• Financial Times coverage of euro area banking M&A and golden power
• Enrico Letta, Much More Than a Market, April 2024
• Mario Draghi, The Future of European Competitiveness, September 2024
• BIS Quarterly Review and CGFS notes on euro area bank integration
• S&P Global Ratings, European Banks 2026 Outlook
• Danmarks Nationalbank, financial stability and EU integration analyses
• MNI Market News, ECB and SSM coverage