EU banking regulator keeps capital framework changes limited

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EU capital framework update

Highlights

The European Banking Authority proposes targeted changes including merging the countercyclical and systemic risk buffers and removing the pillar 2 guidance buffer from leverage ratio rules affecting 23 banks.
EBA rejects calls for deeper capital framework reforms such as scrapping certain buffers and ending alternative tier 1 bond eligibility, citing a potential €20.2 billion capital shortfall if the latter were implemented.
EBA's limited reforms contrast with deregulation in the U.S. and UK, where reduced capital requirements could expand large bank assets by $2.9 trillion, while EU capacity may shrink by €1.3 trillion for its top banks.

EBA sets out targeted rule changes

As reported by the Financial Times, the European Banking Authority says it does not support a fundamental redesign of the bloc's bank capital framework and is pursuing targeted, balanced changes instead.

The regulator presents plans to simplify parts of what lenders describe as a duplicative system, including combining the countercyclical capital buffer and the systemic risk buffer into a single measure that can be released in a crisis. It also proposes changes to leverage ratio rules by removing the pillar 2 guidance buffer that currently increases leverage requirements for 23 banks in the EU.

François-Louis Michaud, the newly appointed chair of the EBA, says the proposals are about the design of the framework rather than the level of capital itself. He says the overall resilience of the banking system will not be affected, although supervisors could eventually use the revised structure in ways that ease requirements for some lenders if they are satisfied with their protection levels.

The EBA also rejects several industry requests for deeper reform. It does not back scrapping some capital buffers altogether, does not simplify the core risk-based capital structure, and leaves in place separate pillar 1, pillar 2 and pillar 2 guidance buffers, alongside extra requirements for globally and domestically systemic banks.

The authority also declines an idea recently floated by the European Central Bank to end the eligibility of alternative tier 1 bonds, saying that would leave lenders with a 20.2 billion euro capital shortfall. It additionally proposes aligning the definitions of MREL and TLAC, the two forms of bank debt that can be bailed in during a crisis.

Pressure grows from U.S. and UK deregulation

The EBA's approach contrasts with the broader deregulatory moves now being implemented in the U.S. under President Donald Trump and with easing steps in the UK. That gap is intensifying complaints from EU bank executives, who argue the region remains far more cautious about unwinding restrictions introduced after the 2008 financial crisis and the Eurozone debt turmoil.

The latest EBA package also falls short of recommendations in a report published last week by the European Banking Federation and consultants Oliver Wyman. That report says the EU has seven layers of bank capital buffers and as many as 86 different requirements across member states, compared with three buffers in the U.S.

Fernando de la Mora, co-head of financial services at Alvarez & Marsal, says the EBA's changes are minor compared with reforms under way in the U.S. and UK because they mainly streamline requirements without lowering the capital level required. Alvarez & Marsal estimates in a report last month that deregulation in Washington and London will allow 11 of the biggest U.S. and UK banks to expand assets by a combined 2.9 trillion dollars, while incoming rules are set to reduce balance sheet capacity at seven of the EU's biggest banks by 1.3 trillion euros.

Michaud says the EBA report opens further avenues for future work and is not the end point, with the European Commission expected to present its own proposals on bank competitiveness. That keeps open the prospect of another round in the debate over whether the EU can simplify supervision without weakening financial stability.

In our earlier article, we covered the UK government’s decision to review defined benefit pension transfer rules after an unusual deal used flexible apportionment arrangements in an unexpected way. We noted that the aim is to ensure safeguards keep pace with innovation in pension restructuring, potentially affecting how future transactions are structured while preserving legitimate flexibility.

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