ECB moves to lighten regulatory burden but rules against easing capital requirements

The European Central Bank has unveiled plans to simplify capital rules for larger lenders and ease regulatory burdens on smaller banks, even as it rejected calls for lower capital levels.

Key proposals from the ECB, announced on Thursday morning, include simplifying capital requirements, with a set of four mandated buffers to be reduced down to two. Of these, one will contain capital that cannot be released, with a second adjustable by national authorities when necessary.

The proposals will “strengthen and complete the EU single rule book”, and reduce the effect of divergent national approaches, ECB vice-president Luis de Guindos told a briefing.

They will not, however, result in banks’ overall capital requirements being lowered, he stressed.

“Simplification efforts should maintain banks’ resilience and by banks’ resilience, we mean the level of capital,” de Guindos said. “We do not want to try to undermine the present situation of capital of the European banks.”

The package will now be presented to the European Commission for ⁠consideration.

The proposals mark a turning point for EU banks after a decade of tighter banking regulation in response to the global financial crisis. Recent deregulatory moves by the US under the Trump administration have added urgency to the EU’s response.

The Bank of England earlier this month lowered the amount of Tier 1 capital that UK banks are required to hold for the first time since 2015.

The ECB’s easing of rules for smaller banks would be accompanied by a strengthening of central regulatory power. The proposal would change the status of EU banking rules from directives to directly applicable regulations.

The central bank also proposes the creation of a European governance mechanism to take an overall view on capital adequacy.

“A top-down approach is needed in terms of stress testing,” de Guindos said. “That’s the approach.”

A simplified approach can “improve compliance and competitiveness,” said Andrew Whitworth, a fintech consultant in Madrid. “The complexity of regulation has for a long time been a barrier to growth” for smaller banks.

Whitworth added that each time there is a financial crisis, “regulation increases, then the regulatory burden is seen to be too high so is cut back”.

“You have to hope that this isn’t just the usual deregulatory pendulum swing that will lead to future instability,” he said.