The European Union (EU) policymakers have renewed calls for cross-border bank mergers, as they look to address the multi-trillion euro investments needed to finance the bloc’s green and digital transformation.

A plan for a fully-fledged banking union has stalled and bankers and supervisors point to the absence of a joint guarantee system for eurozone depositors as the biggest impediment to its progress.

Below is an explanation of why little-understood banking rules and the lack of a European deposit insurance scheme or Edis make cross-border takeovers a tall order for European bankers, who routinely complain of excessive hurdles.

The eurozone had taken significant steps towards a banking union, by establishing a single oversight system under the European Central Bank (ECB) a decade ago and adopting a single resolution mechanism to deal with failing banks.

But current rules, forged after the global financial crisis and a string of bank bailouts, reflect expectations countries would need to deal with any banking crisis at a national level.

This is a particular problem for so-called host countries, several regulatory and banking sources told, such as Belgium, Croatia and Portugal, where a significant portion of their banking sector is made up of local units of foreign banks.

In some cases, these units account for a small fraction of the parent company’s assets, making them relevant in the host country but of little importance for the bank’s home country.

Under current rules, liquidity and capital is ring-fenced at the national level, depriving cross-border banking groups of what could be a competitive advantage.

Without a single deposit scheme, it has so far proven impossible to overcome rules designed to keep bank capital and liquidity within the borders of the subsidiary’s host country.

This so-called “solo” regime is reassuring for countries such as Belgium that banks operating in their markets will not need to depend on their parent entities for support in a crisis.

But it discourages banking takeovers in another jurisdiction because it makes it impossible for groups to efficiently manage liquidity and capital.

Banks with a cross-border presence must meet requirements on capital, liquidity and loss-absorbing debt both at a group and subsidiary level, restricting intra-group flows.

Any excess cash generated in a country gets “trapped” and cannot be freely shifted across national borders to support the banking group’s operations elsewhere.

In 2021, calculations by ECB supervisors showed that there were around £250bil of high-quality liquid assets that could not be moved freely within the banking union because of provisions at the European Union (EU) and national level.

Trapped assets are created by multiple sets of rules at both the national and European level.

National laws apply because member states have adopted EU rules on bank capital requirements, which in turn contain the internationally agreed Basel framework.

Being based on national laws, capital requirements cannot be waived by European supervisors, so banks must keep capital ring-fenced in each jurisdiction.

European supervisors can, however, waive bank liquidity requirements at the subsidiary level.

This will allow banks to create cross-border liquidity sub-groups.

But banks have so far shown little interest in such waivers, several sources said. That is partly because member states can render them ineffective by applying another set of rules, the sources added.

The so-called large exposure rule caps at 25% the amount of a bank’s capital that can be exposed to any counterparty.