Resilience, integration and competitiveness: building the future of European banking
The ECB calls for simplifying EU banking rules to boost competitiveness while preserving resilience, citing stronger capital ratios and improved profitability as evidence against immediate capital requirement reductions.
The European Central Bank (ECB) highlighted the need to simplify EU banking regulations to enhance competitiveness without compromising resilience, marking the 15th anniversary of the European Systemic Risk Board (ESRB). It noted that stricter post-crisis rules have strengthened bank balance sheets, with median Tier 1 capital ratios in the euro area more than doubling from around 8% in 2009 to over 16% today. The ECB argued that while the regulatory framework has reduced crisis risks, its complexity now burdens banks and may hinder efficiency.
The ECB proposed merging capital buffers into two categories—a non-releasable buffer combining the capital conservation and systemic buffers, and a releasable buffer for the countercyclical and systemic risk buffers—to streamline prudential requirements. It also suggested simplifying the leverage ratio framework by reducing elements from four to two: a 3% minimum requirement and a single leverage ratio buffer. Additionally, the ECB recommended aligning resolution frameworks for MREL and TLAC to reduce complexity while maintaining loss-absorbing capacity.
The ECB emphasized that a simpler regime for smaller banks, building on existing EU rules for small and non-complex institutions, could enhance proportionality without sacrificing resilience. It also noted ongoing supervisory simplification efforts, including the discontinuation of around 40 out of over 100 guidance documents to improve efficiency. These measures aim to reduce regulatory burden while preserving the financial system’s stability.
The ECB cautioned against assuming that lowering capital requirements would immediately boost competitiveness, citing mixed academic evidence on the relationship between capital levels and lending. It noted that while higher capital requirements may temporarily reduce credit supply in crisis conditions, recent studies under more favorable economic conditions show no significant negative effect. The ECB stressed that competitiveness depends on multiple factors beyond capital, including innovation, IT investment, and equity attractiveness.