ECB supervisory arm backs simpler euro zone bank capital buffer framework

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ECB backs simpler bank buffers

Highlights

ECB Supervisory Arm proposes merging multiple macroprudential buffers into two categories—non-releasable and releasable—to simplify the EU bank capital framework.
The new framework would retain separate Pillar 2 guidance, aim to improve coherence and usability of buffers in stress periods, and enhance communication to avoid stigma.
Enhanced coordination via an expanded Macroprudential Forum, involving both microprudential and resolution authorities, would support integrated capital policy across the banking union.

Proposed overhaul of buffer design

According to ECB Banking Supervision, the ECB Supervisory Arm (SSM) says the EU capital framework now includes several layers of requirements and macroprudential buffers with different legal bases, methodologies and decision-makers, creating complexity that can weaken their practical usability.

It says banks may hesitate to use buffers because of distribution restrictions, market pressure and stigma, while parallel constraints can further reduce the capital space available in practice. During the pandemic, released buffers helped banks continue supplying credit, but evidence also suggests lenders tried to keep distance from buffer thresholds, especially when capital space was limited.

The proposed simplification developed by the ECB's High-Level Task Force and endorsed by the Governing Council would merge the existing macroprudential buffers into two categories. A non-releasable buffer would combine the capital conservation buffer with the higher of the buffers for global and other systemically important institutions, while a releasable buffer would combine the countercyclical and systemic risk buffers and carry a positive rate in the early stages of the financial cycle.

The ECB's supervisory arm says Pillar 2 guidance would remain separate and that the aim is not to lower resilience, but to improve coherence and make buffers credibly available for release in periods of stress. It also says clearer communication is needed so that buffer use is seen as the framework operating as intended, rather than as a signal of weakness.

Coordination and banking union implications

A more usable framework also requires closer coordination between microprudential and macroprudential policy, the ECB's supervisory arm says. While the two sets of tools serve different purposes, it says their interaction affects both the level of capital and how usable it is, making a clear division of roles essential even as overlaps are reduced.

It argues that governance should evolve through stronger coordination and convergence, guided by common principles and methodologies for calibrating macroprudential elements. The SSM says this does not require changing the current allocation of responsibilities, but it does require a more holistic view of capital demand across the banking union.

Under the proposal, an enhanced Macroprudential Forum bringing together members of the Governing Council and the Supervisory Board would play a stronger role by assessing how different layers of capital requirements interact across the system. The discussion should also involve the Single Resolution Board so the full interaction between microprudential, macroprudential and resolution requirements is reflected.

The ECB's supervisory arm says that, over time, this approach could support a broader shift toward a more common financial stability policy in an increasingly integrated banking market. It argues that a simpler framework would be easier to explain, calibrate and deploy in bad times, while preserving the resilience banks have built up.

Our earlier report on English fiscal devolution proposals looked at plans to shift mayoral funding away from central grants toward locally retained taxes, with regions keeping a share of income tax and corporation tax. It also outlined safeguards such as a minimum funding floor financed by tariffs on wealthier areas, aiming to expand local fiscal autonomy without widening regional inequality.

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