ECB Moves to Simplify Capital Buffer Rules for Banks

FRANKFURT – The European Central Bank (ECB) is set to propose a simplification of capital buffer rules imposed on banks, aiming to streamline some of the complex regulations that emerged after the global financial crisis, according to sources familiar with the plans.

In a presentation scheduled for Thursday, ECB Vice-President Luis Deguindos will outline measures designed to reduce—well, not exactly reduce—capital requirements that banks must maintain to shield against financial shocks.

This move is certainly more cautious than those implemented by regulators in the UK and the US recently, which may disappoint some bankers who were looking for greater leniency.

This recommendation results from a compromise among European Union (EU) member states, merging two existing capital requirements: the systemic risk buffer (SyRB) and the countercyclical capital buffer (CCyB), as noted by two individuals who chose to remain anonymous due to the confidential nature of the discussion.

An ECB spokesperson, for their part, declined to provide any comment on the matter.

Complexity of Current Regulations Under Scrutiny

Experts in finance have expressed that the present system has grown overly complicated and that simplification is welcome, provided it doesn’t lead to a decrease in the capital that banks are required to hold.

“Robust regulation plays a crucial role in supporting the ratings of European banks,” shared Marco Troiano, a director at Scope Ratings. “The ECB’s message has been consistent: while there’s room for simplification, we should not compromise on overall capital levels. I find this approach commendable,” he added.

After the ECB’s proposals, which then move on to the Executive European Commission, discussions about potential modifications to EU law will arise, shared between the Commission, the European Parliament, and the Council of member states. However, such changes often require years to materialize and can reignite long-standing debates regarding how much Europe should relax regulations designed to avoid taxpayer bailouts in times of bank distress.

Bankers Call for Clarity

Implemented as part of an overhaul to prevent another banking sector crisis akin to that of 2007-2008, the SyRB and CCyB buffers were introduced across the 27-member European Union.

Bankers have voiced that the regulations are too elaborate and place them at a disadvantage compared to their U.S. counterparts, particularly with the Trump administration actively pursuing deregulation measures.

For example, last Friday, U.S. regulators rescinded guidance that was intended to rein in leveraged lending, which allows a shift of business to less-regulated private credit funds.

Meanwhile, the Bank of England recently maintained its countercyclical capital buffer while also reducing estimations for the capital banks should hold to support lending growth, marking the first such reduction since the crisis.

As part of its ongoing efforts, the ECB is looking to cap the ongoing work of the Special Committee on Regulatory Simplification, aiming to limit the requirements to only two categories. These categories will include requirements that may be lifted in times of stress and those that banks must consistently meet.

A Balancing Act

The SyRB allows national regulators to request additional capital if they identify risks not addressed by existing requirements. By merging it with the CCyB, which is meant to temper credit booms, the objective can be to simplify requirements without necessarily decreasing the total capital banks need to hold. Ultimately, the quantity of capital will still depend on decisions made by national supervisors.

Efforts toward simplification are focused primarily on eliminating duplicate rules, though sources indicate a limited desire to lessen overall capital requirements.

Currently, the SyRB stands at just 0.5% in countries like the Czech Republic and Italy, and can be as high as 7% in Denmark. These buffers can relate to all loans or just specific types, such as real estate.

The recommendations from the ECB appear to indicate a compromise among euro zone authorities and highlight areas of disagreement in other aspects, as noted by the sources.

France, for instance, has advocated for clearer requirements regarding capital needed to cover losses if Europe’s seven largest financial institutions—four of which are based in France—were to face failure. On the flip side, Germany, where small and medium-sized regional banks make up almost half of the total volume, has sought to ease regulations for these institutions, suggesting they should rely more on equities than convertible bonds to meet some criteria. However, both proposals lack adequate support and seem to be limited options in the report.