Brussels -Fewer national rules, too many and too fragmented, and more European systems, harmonized and coordinated at the supra‑national level. Simplification for banks requires accelerating the integration of regulatory, supervisory, and reporting mechanisms. The Governing Council of the European Central Bank adopts recommendations for a sector reform in the wake of the European Commission’s work, and also shares its thoughts. The EU executive is preparing a report on the overall situation of the banking system, due to be presented in 2026, and the ECB is offering Brussels elements for omnibus packages that can be truly effective, without measures that could compromise the financial stability of credit institutions.​

The ECB is keen to point out that it is necessary to “simplify the framework, while maintaining the resilience of the European banking system and ensuring that microprudential, macroprudential and resolution authorities continue to meet their objectives effectively.” Not an easy goal, which leads Frankfurt’s experts to suggest to the EU executive how to move to ensure the desired result. 

One of the recommendations from the Governing Council is to simplify the structure of banks’ capital requirements and buffers (capital reserves to absorb potential shocks). This is to be done through two changes. First, unifying the current levels of capital buffers into just two: a non-releasable buffer, not to be touched, and a releasable buffer, which can be drawn upon, which the authorities can reduce in times of crisis. In unifying the buffers, it will be important to preserve the authorities’ existing powers and competences. Secondly, it proposes reducing the leverage ratio framework from four to two elements: a minimum requirement of 3 percent and a single buffer, which could be set to zero for smaller banks.​

Conference room of the ECB [photo: Carlo Carino/imagoeconomica]

The direction to follow is Basel III, the international framework for banks, conceived in the wake of the 2008 economic crisis, to strengthen supervision, risk management, and the solvency of the global banking sector. “International cooperation is crucial, and all jurisdictions should ensure full, timely, and faithful implementation of Basel III,” the ECB notes. With this in mind, the Governing Council proposes to increase the Additional Tier 1 capital  capacity (known as Tier 1, the core of a bank’s resources, consisting of shareholder capital, retained earnings, capital gains, and accumulated reserves), so that it can better absorb losses during the bank’s normal operations.

European control room 

The real news, with greater political impact, relates to the European aspect of the reform the ECB is proposing. The Governing Council explains, “To achieve further harmonisation, the Governing Council recommends shifting EU banking rules from directives to directly applicable regulations,” the Governing Council said. It means eliminating national room for manoeuvre and expanding European control.

With regard to supervision, the Governing Council recommends completing the Single Rulebook and harmonising rules on licensing, governance, and transactions with related parties, which would reduce complexity. Supervisors should be given greater flexibility, for example, in how often they review banks’ internal models. Furthermore, the central bank urges the European Commission to introduce a materially simpler prudential regime for smaller banks, which builds on the existing EU regime.
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Lastly, the Governing Council also calls for the completion of the banking union and the Savings and Investments Union to reduce national fragmentation and enable more efficient capital markets.

English version by the Translation Service of Withub