European Commission to ease bank capital rules as EU weighs competitiveness push

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EU eases bank capital rules

Highlights

European Commission draft proposes removing some Pillar 2 capital requirements linked to the leverage ratio and reducing reporting obligations for banks.
The reform package contemplates lowering additional capital buffers and reviewing the European Banking Authority's mandate to enhance sector competitiveness.
The draft advances a limited deposit insurance model granting national schemes crisis liquidity access instead of full EU insurance, addressing cross-border bank risk.

Draft reform package targets capital and reporting rules

As reported by Financial Times, citing Politico, a draft European Commission report due on Friday says Brussels will propose removing Pillar 2 capital requirements linked to the leverage ratio for some banks. The measure forms part of a broader package that outlines the scope of legislative proposals expected next year, although the draft remains subject to change.

The leverage ratio sets the minimum capital a bank must hold as a share of its total assets. Banks have long argued that overlapping requirements imposed by different authorities leave them at a disadvantage to rivals in other jurisdictions and force them to hold more funds against risks on their balance sheets.

The draft also says the EU should reduce the number of additional capital buffers banks must meet and improve how those buffers are designed and calibrated. It further proposes cutting reporting requirements for lenders and reviewing the mandate of the European Banking Authority as part of a wider effort to strengthen the sector's competitiveness.

Competitive pressure and deposit insurance overhaul

The Commission's planned easing follows similar moves in the U.S. and UK, where regulators have also lowered leverage-related requirements. Bank executives say the leverage ratio was intended as a backstop to risk-based capital rules but is increasingly becoming the main constraint for some lenders.

The draft also provides more detail on an expected overhaul of the long-stalled European Deposit Insurance Scheme. Instead of full European insurance, Brussels aims to advance a more limited model that would give national deposit guarantee schemes access to liquidity in a crisis, addressing concerns that the failure of a large cross-border bank could overwhelm national backstops and force taxpayer support.

EU banks have long said the absence of a common deposit insurance framework has hindered cross-border consolidation because national authorities are less willing to allow funds to move freely among subsidiaries in different member states. The European Commission did not respond to a request for comment.

In our earlier article on the Federal Reserve’s quantitative tightening and bank funding risks, we explained how the QE-era surge in reserves and uninsured deposits expanded bank balance sheets and increased pressure on leverage and liquidity management. The piece warned that pushing reserves too low could strain funding and revive vulnerabilities, and argued against weakening leverage and liquidity rules in ways that could reduce resilience or distort banks’ incentives.

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