The European Central Bank (ECB) has announced a set of proposals aimed at streamlining the regulatory and supervisory framework for banks in the European Union.
The proposals aim to reduce the number of components used to measure bank risk and capital requirements, the ECB said.
One major recommendation is to merge the existing capital buffer layers, condensing them into two types — one that remains fixed and another that authorities could lower in periods of financial stress.
Capital buffers are safeguards that banks are required to hold to absorb losses and protect depositors in case of financial trouble.
Smaller banks would face simpler requirements under a proposed expanded regime, allowing a streamlined approach while retaining financial stability.
The leverage ratio, a measure of a bank’s capital relative to its assets, would consist of just a minimum requirement and a single buffer, down from four elements currently.
Integrated system
The ECB has also called for the completion of key projects such as the banking union and the savings and investment union to reduce differences between national markets and improve capital flows across borders.
For failed banks, the proposals suggest aligning rules for all institutions more closely with those for the largest banks — known as global systemically important banks — while preserving the ability to absorb losses and recapitalise, the ECB said.
This is intended to ensure transparency and keep the EU in step with international standards.
Another proposal recommends shifting EU banking laws from directives, which require individual countries to write their own rules, to directly applicable regulations, creating more consistency across member states.
The ECB has recommended changes to the EU-wide stress test, the process used to assess the resilience of banks in hypothetical negative economic scenarios, suggesting that it be simplified and its results made more relevant to both system-wide and individual bank assessments.
