From FDI Screening to Banking Consolidation: The New EU Regulation and Its Implications for Intra-EU and Domestic Transactions

Authors: Carlo Di Marzio (Banca d’Italia)

The views and opinions expressed in this post are solely those of the author and should not be attributed to, nor be regarded as representing the views of, the institution with which the author is affiliated.

Introduction

On 26 June 2026, the revised Foreign Direct Investment Regulation (Regulation (EU) 2026/1386, or the “Regulation”) was published in the Official Journal of the EU, bringing to a close the trilogue negotiations launched in June 2025 and reflecting the compromise reached by the co-legislators on the new framework governing foreign direct investment (“FDI”) screening procedures in the EU.

As previously discussed in this blog (here), the new Regulation marks a significant departure from the approach taken under Regulation (EU) 2019/452, under which the establishment of a screening mechanism remained voluntary. By contrast, the new framework requires Member States to put in place screening mechanisms for certain specifically identified sectors.

The inclusion of systemically important banks within the minimum scope of the FDI screening regime

Among the key changes introduced by the Regulation is the express mention of part of the banking sector within the categories for which Member States are required to establish screening mechanisms. In this respect, Regulation (EU) 2019/452 only contained a generic reference to financial infrastructures, as a sub-category of critical infrastructures whose potential exposure to the effects of foreign direct investment could be taken into account by Member States and the Commission.

The Commission’s proposal would have brought within the scope of the Regulation a broad range of financial undertakings, including credit institutions falling within the definition of “large institutions” under Article 4(1), point (146), of Regulation (EU) No 575/2013 (the “Capital Requirements Regulation” or “CRR”). These include:

• global systemically important institutions (“G-SIIs”) and other systemically important institutions (“O-SIIs”), namely credit institutions identified by the competent authorities as systemically important on the basis of criteria such as size, importance for the economy, cross-border activities, interconnectedness with the financial system, substitutability of services or infrastructure and complexity;
• the three largest credit institutions in a Member State in terms of total asset value; and
• credit institutions which, on an individual or consolidated basis, have a total asset value equal to or greater than EUR 30 billion.

Compared with the Commission’s proposal, the European Parliament’s first-reading position, adopted on 8 May 2025, maintained the same broad approach, while adding further categories of financial undertakings. By contrast, the Council’s general approach of 11 June 2025 did not include any financial-sector undertaking among the categories for which Member States would be required to establish screening mechanisms. Accordingly, unlike the Commission’s proposal and the Parliament’s position, the Council’s approach would not have required Member States to screen investments in any category of banks or other financial undertakings.

The final text of the Regulation takes an intermediate approach. It recognises the relevance of the financial sector for FDI screening purposes, but narrows the range of undertakings subject to screening compared with the Commission’s proposal. With specific regard to the banking sector, the minimum scope is limited to O-SIIs (Article 4(15)(f)(v) of the Regulation), without extending to all credit institutions falling within the broader notion of “large institutions” proposed by the Commission. The Regulation nevertheless allows Member States to extend the application of screening mechanisms beyond the cases expressly identified therein.

Coordination with the sectoral banking framework

In light of its application to credit institutions, the Regulation also requires certain coordination provisions with sectoral banking rules. In particular, the Regulation expressly does not apply to operations carried out in the context of tools under the resolution frameworks for banks and other financial undertakings (Article 1(5)(a) of the Regulation), on the basis that their urgency is incompatible with prior FDI screening (as also stated in recital 16). For this reason, the Regulation invites resolution authorities to take into account, to the extent possible, the objective of the FDI framework when performing resolution actions involving a foreign investor and strategic assets.

In addition, the Regulation clarifies that its rules are without prejudice to the rules on the prudential assessment of acquisitions of qualifying holdings in credit institutions under Directive 2013/36/EU (the “Capital Requirements Directive” or “CRD”), which the Regulation expressly characterises as a distinct procedure with a specific objective, different from that of the FDI framework (recital 61).

The pre-Regulation debate

To assess the possible implications of the new FDI framework for the banking sector, it is useful to recall the debate that preceded the adoption of the Regulation on the application of FDI screening regimes and public interest review powers to transactions involving credit institutions.

Questions concerning the compatibility of these regimes with EU law arose not only in relation to investments by third-country investors, which traditionally fall within the scope of FDI screening, but also in relation to intra-EU and even purely domestic transactions. In some Member States, public interest review mechanisms have been applied, or may apply, to bank consolidation transactions irrespective of the origin of the investor, thereby raising broader issues concerning their interaction with EU banking law and the fundamental freedoms.

Alleged incompatibility with EU sectoral banking legislation

The main objections to the application of screening regimes to the banking sector concerned the alleged incompatibility of such powers with EU sectoral banking legislation, notably Regulation (EU) No 1024/2013 establishing the Single Supervisory Mechanism (“SSMR”) and the CRD.

In substance, it was argued that such screening mechanisms would be incompatible with the provisions of the SSMR and the CRD assigning responsibility for the prudential supervision of banks to the ECB and the national competent authorities (“NCAs”), insofar as they would allow Member State governments to take decisions on prudential matters and, potentially, to interfere with ECB or NCA decisions in that field.

In this context, particular relevance attaches to Article 4(1)(c) SSMR, which confers on the ECB exclusive competence for the prudential assessment of acquisitions of qualifying holdings in credit institutions, i.e. direct or indirect holdings in a credit institution representing 10% or more of the capital or voting rights, or making it possible to exercise significant influence over the management of that institution. In addition, concerns regarding incompatibility with EU banking legislation were reinforced by the entry into force of Directive (EU) 2024/1619 (“CRD VI”), which establishes a harmonised framework governing acquisitions, mergers, divisions and other structural changes involving credit institutions.

The alleged interference would also stem from the highly discretionary nature of the powers conferred on governments, where the relevant national regimes fail to specify with sufficient precision the grounds that may be relied upon to oppose or impose conditions on a transaction and therefore do not exclude the risk of overlap with assessments governed by sectoral banking legislation.

Conversely, those supporting the application of FDI screening regimes to the banking sector emphasised that FDI screening and prudential supervision pursue different objectives. While banking supervision is aimed at ensuring the sound and prudent management of the institution, FDI screening seeks to prevent risks to the security or public order of the Member State in which the target is located. Notably, this argument was supported by recital 37 of Regulation (EU) 2019/452, which characterised the prudential assessment of acquisitions of qualifying holdings in the financial sector as a distinct procedure with a specific objective, separate from the FDI framework.

In addition, even before the new FDI framework, EU law expressly allowed an M&A transaction targeting a bank to be subject, in addition to the powers conferred on the ECB and the NCAs, to another layer of scrutiny, namely merger control by the Commission and national competition authorities.

In particular, the relationship between the two regimes is made explicit by Article 21(4) of Council Regulation (EC) No 139/2004 (the “Merger Regulation”), which includes prudential rules among the legitimate interests for the protection of which Member States may adopt appropriate measures, as well as by the recently introduced Article 27h(1) CRD, which provides that the prudential framework for mergers and divisions of banks applies without prejudice to the application of the Merger Regulation.

Alleged incompatibility with freedom of establishment and free movement of capital

Second, concerns were raised regarding a possible infringement of the freedom of establishment and the free movement of capital, enshrined in Articles 49 and 63 TFEU, in particular where FDI regimes and public interest review powers in the banking sector apply to intra-EU transactions.

Here again, the main issue lies in the broad discretion conferred on governments, which may amount to an unjustified restriction on the freedom of establishment and the free movement of capital, insofar as it does not ensure that those powers are exercised exclusively in pursuit of public policy or public security objectives, nor that their exercise complies with the principle of proportionality.

More specifically, critics of the application of FDI screening regimes to the banking sector argued that purely economic grounds are not sufficient to justify the exercise of FDI powers. National measures should not be used to protect national champions, preserve domestic lending levels, prevent politically undesirable consolidation, or pursue industrial policy objectives under the label of economic security.

Possible implications of the new FDI regime for the banking sector

The adoption of the Regulation opens up new questions concerning the exercise of screening powers over foreign direct investments in the banking sector. As noted above, the Regulation expressly includes certain categories of credit institutions within its scope of application, albeit to a more limited extent than under the Commission’s initial proposal. Since the Regulation establishes a common minimum scope, Member States remain able to extend their national screening mechanisms to FDI transactions involving other categories of credit institutions, provided that such extensions are consistent with the Regulation and with EU law. The more delicate question is whether, and to what extent, the same reasoning may be relevant for intra-EU or domestic transactions, which remain outside the scope of the Regulation and must therefore be assessed directly under the Treaty framework and sectoral banking legislation.

Is there a general incompatibility between FDI screening and prudential supervision?

The express inclusion of part of the banking sector among the areas subject to screening may weaken the argument that powers conferred on governments are, as such, wholly incompatible with the review and approval powers provided for under sectoral banking legislation. Before the review of the FDI Regulation, the relationship between prudential rules and the FDI regime was not as clear as the relationship between prudential supervision and merger control.

Now that the Regulation requires Member States to establish screening mechanisms for foreign investments in certain systemically important institutions, it appears more difficult to maintain that there is an incompatibility in principle between FDI screening and banking prudential supervision.

This conclusion is clearly valid with regard to foreign investments, for which Member States will therefore be required to establish screening mechanisms operating in parallel with banking supervision. The extension of this reasoning to intra-EU or domestic transactions is more delicate, as those transactions do not fall within the scope of the Regulation. For such transactions, the Regulation does not constitute a direct legal basis, but may nevertheless provide a useful interpretative benchmark for assessing whether, and under what conditions, public interest review powers may coexist with banking prudential rules.

Indeed, the recognition in the Regulation that certain foreign investments in O-SIIs may be subject to screening confirms that transactions involving systemically important banks may, in principle, raise security or public order concerns. However, in the case of intra-EU or domestic transactions, any restrictions on the freedom of establishment or the free movement of capital must be justified directly under Articles 52 and 65 TFEU and the relevant case-law, without relying on the Regulation as an autonomous legal basis.

How can compliance of screening mechanisms with EU law be ensured?

Following the adoption of the Regulation, the issue no longer appears to be primarily one of incompatibility in principle between prudential supervision and the FDI regime. Rather, it becomes a concrete question of identifying criteria capable of ensuring that screening powers are not exercised, de facto, in a manner that undermines prudential supervisory competences or fundamental freedoms. In this respect, the distinction between foreign investments, which are subject to the Regulation, and intra-EU investments, whose legal basis lies directly in Articles 49 and 63 TFEU, remains relevant.

As a general point, it should be recalled that the prudential assessment of M&A transactions involving banks is based on a number of criteria, including the reputation of the proposed acquirer or of the financial stakeholders involved in the proposed operation, their financial soundness, whether the credit institution will be able to comply and continue to comply with prudential requirements and whether there are reasonable AML/CFT concerns (see Articles 23 and 27j CRD).

With regard to foreign investments, Article 19 of the FDI Regulation may help to delineate the scope of FDI screening, as it identifies a number of non-exhaustive risk factors for the assessment to be carried out by Member States. These concern, on the one hand, the effects of the investment on strategic activities and assets, such as EU programmes, critical technologies and infrastructures, sensitive data and military facilities. On the other hand, they concern the risk profile of the foreign investor, assessed on the basis of several elements, including links giving rise to a risk of contributing to the development of the military capabilities of third countries or to human rights violations, the possible application of restrictive measures, and the investor’s origin in high-risk AML/CFT jurisdictions.

These criteria are useful in ensuring that screening mechanisms are applied exclusively for the purpose of preventing negative effects on security or public order, in compliance with Articles 52 and 65 TFEU. Possible overlaps with the competences of the ECB and the NCAs cannot, however, be ruled out, since certain risk factors may also be relevant for the prudential assessments entrusted to those authorities. This may be the case, for example, where risks arise as to the target bank’s ability to comply with cybersecurity requirements, or where significant AML/CFT concerns stem from the investor’s origin in a high-risk jurisdiction. Moreover, the non-exhaustive nature of the list set out in the FDI Regulation does not prevent Member States from identifying additional risk factors to be taken into account in the exercise of their screening powers.

An interpretative approach to intra-EU transactions

With regard to intra-EU transactions, the issue is even more complex, as that the considerations set out above mainly concern foreign direct investments falling within the scope of the Regulation, including investments by third-country investors in credit institutions. By contrast, intra-EU transactions remain outside the scope of the Regulation and therefore cannot rely on it as an autonomous legal basis for the exercise of screening powers. For such investments, screening mechanisms affect the fundamental freedoms laid down in Articles 49 and 63 TFEU and may be justified, where appropriate, on the basis of Articles 52 and 65 TFEU. Restrictions on intra-EU capital movements therefore arise in a different legal context from restrictions on capital movements involving non-EU countries, as also recognised in Commission Communication 2020/C 99 I/01. Accordingly, screening mechanisms applicable to intra-EU transactions must comply, first and foremost, with the criteria developed in the case-law of the CJEU, including the principle of proportionality, the prohibition of restrictions based on purely economic grounds, and the requirement that there be a genuine and sufficiently serious threat to a fundamental interest of society.

At the same time, the FDI Regulation may serve as a useful reference point for assessing the compatibility of screening mechanisms with the principles set out in the TFEU. Indeed, as clarified by the CJEU in Test Claimants in the FII Group Litigation, Member States may justify restrictions on capital movements involving non-EU countries on grounds that would not justify similar restrictions between Member States. It appears more difficult to argue the reverse, namely that a Member State could demonstrate the need for more stringent restrictions in respect of intra-EU transactions than those considered permissible for foreign investments.

However, it should also be borne in mind that the FDI Regulation establishes a minimum harmonisation regime for foreign investments: Member States may adopt complementary or more specific national provisions (Article 3) and may take into account additional risk factors beyond those set out in the Regulation (Article 19). Against this background, it would be difficult to argue that the FDI Regulation operates as an indirect constraint also in relation to intra-EU transactions. Rather, it may more plausibly be regarded as an interpretative benchmark for such transactions, against which additional restrictions should either not be introduced or, at the very least, should be justified particularly rigorously in light of Articles 52 and 65 TFEU.

In any event, important insights are likely to emerge from the implementation of the new regime. In this regard, it is worth noting that, in its Communication on the Competitiveness of the Banking Sector and the Single Market in Banking, the Commission identifies national interventions in bank mergers as one of the factors preventing EU banks from acquiring scale at EU level, including through cross-border mergers, and announces that it will use its enforcement toolkit where Member State interventions in M&A risk undermining the free movement of services and capital or the freedom of establishment.