When Fragmentation Creates Complexity

In a speech delivered last week, Patrick Montagner, a Member of the Supervisory Board of the European Central Bank (ECB), argued that the difficulties facing the banking sector today stem less from regulatory complexity itself than from fragmentation, and that meaningful simplification will require “cultural change” among both supervisors and banks.

Montagner reframed the prevailing debate at the outset. Complexity in banking regulation, he argued, is mostly a reflection of reality. The institutions supervised in the euro area operate across dozens of countries, running sophisticated businesses while navigating an ever-changing risk environment.

Some complexity is also needed to accommodate the diversity of Europe's banking landscape, which spans large systemic institutions and small local cooperatives alike. Demand for detailed rules, he noted, often comes from the regulated sector itself, as banks facing supervisory discretion frequently request precise guidance to eliminate “interpretive uncertainty.”

The deeper problem, Montagner argued, is fragmentation — both within the prudential framework, which is split across multiple levels of legislation and national discretions, and in the wider structural differences across member states, where insolvency regimes, tax systems, and consumer protection frameworks remain fundamentally national. This is what, in his words, “generates redundancy, inconsistency, and unnecessary burden without producing better prudential outcomes.”

Simplification, he stressed, is a shared project requiring “a cultural change on both sides.” Supervisors should focus on material risks, he said, ensuring supervision is risk-based rather than compliance-driven. Meanwhile, banks must take responsibility for adapting the rules to their specific operations, rather than seeking guidance for every possible scenario, he argued.

“The case for simplification is real, and we are pursuing it,” Montagner concluded. “But the financial system we supervise is sophisticated, interconnected and rapidly evolving … Past crises, many of which occurred when regulation was underdeveloped, also remind us that a thinner rulebook is not, in itself, a guarantee of financial stability.”