Europe’s main banking regulator is trying to clear the path for mergers between the continent’s lenders as the belief grows that scale is the key to reviving the struggling sector, people familiar with the matter said.

The regulator—an arm of the European Central Bank that covers the largest eurozone banks—is making this softer stance toward potential tie-ups known privately, according to bankers, supervisors and analysts. Some of its officials have also publicly tackled the issue in recent speeches. It marks a departure for the regulator from its perceived stance of imposing prohibitively tough conditions on mergers.

The ECB showed an openness to work with two Spanish midsize banks, Liberbank SA and Unicaja Banco SA, during merger discussions last year, according to people familiar with the talks. The talks with the regulator revolved around whether any additional capital could be raised through the issuance of debt, rather than from shareholders, according to one of the people.

The regulator is also more open to giving some time for synergies from a merger to kick in—for example, accepting a smaller capital buffer during that period, according to one of the people familiar with the matter.

The loosening comes as the eurozone’s fragmented banking sector struggles to make money. Low interest rates—which are set up by the ECB’s own monetary-policy arm—continue to eat up banks’ margins on loans, hurting their profitability and making them largely unattractive for investors. Mergers have been long touted as a possible answer to the region’s banking woes. Part of the rationale for larger European lenders is they need scale to compete with U.S. rivals that have outperformed them on their own patch since the global financial crisis. European banks’ average return on equity is around 6%, almost half that of U.S. peers.