The European Central Bank is considering eliminating a form of hybrid debt that European banks have used to bolster their capitalization since the collapse of Credit Suisse bank in 2023. Under the proposal, so-called Additional Tier 1 Bonds, a form of debt that has some characteristics of equity, would be changed or eliminated altogether to improve the “quality” of capital on banks’ balance sheets, the regulator said. The ECB also plans to simplify capital rules for larger lenders and dial down scrutiny of smaller banks, but it rejected calls from the financial services industry to lower banks’ overall capital requirements.
Last month in WPR, John Boyce looked at the European Union’s updated framework for regulating banks, known as Basel III. Although the framework was intended as a response to the 2008 financial crash, it only came into force this year, thanks to “the glacial pace of EU policy implementation,” Boyce wrote. During the almost two decades in which the reforms were making their way through the EU policymaking apparatus, the powerful European banking lobby succeeded in watering them down. In the interim, expert post-mortems on the “mini-meltdown of 2023” that included the Credit Suisse crash pointed to the prevalence in the European banking system of exactly the kind of risk factors that were responsible for the 2008 crash, Boyce noted.
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