• The European Commission is proposing to reduce capital requirements for certain banks, following the trend of regulatory relaxation in the US and the UK.

• The draft plan foresees the elimination of additional Pillar 2 capital requirements, aiming to simplify the complex regulatory framework.

• It proposes a reduction in reporting obligations and a revision of the European Banking Authority's mandate to boost the sector's competitiveness.

• Brussels is planning a new deposit guarantee system that will secure liquidity for national schemes, bypassing a multi-year impasse.

• The changes satisfy long-standing demands of European banks to remove competitive disadvantages and facilitate cross-border consolidation.

The European Commission will propose this week a reduction in capital requirements for certain banks, as the Commission moves in the direction of regulatory relaxation seen in the US and the UK.

The plan follows long-standing demands from banks, which argue that overlapping capital requirements from different authorities place them at a disadvantage against non-European competitors, forcing them to hold more capital to cover risks on their balance sheets.

The proposed change is part of a report expected to be published on Friday, which will define the scope of legislative proposals anticipated next year.

In a draft of the report seen by the Financial Times, the Commission states that it will propose the elimination of "Pillar 2 capital requirements" related to the leverage ratio. These requirements are discretionary additions that supervisory authorities, such as the ECB, can impose if they believe that other capital requirements do not adequately address a bank's risk level.

The Commission Follows US and UK Examples

The plan to reduce the leverage ratio, which defines the minimum capital a bank needs as a percentage of its total assets, follows similar moves by the US and the UK to lower these requirements.

Bank executives complain that the leverage ratio was meant to be a backstop to separate risk-based capital rules, but has increasingly become the main constraint for some of them.

The draft also states that the EU should reduce the number of extra capital buffers that banks are required to meet, and that their design and calibration should be improved.

A previous draft stated that the Commission would seek to simplify the system of overlapping requirements, but did not commit Brussels to reducing the capital that banks must maintain on their balance sheets.

Caroline Liesegang, head of capital and risk management at the industry group AFME, told the FT that the changes were "welcome signs that policymakers recognize the need to eliminate supervisory additions that have made the [regulatory] framework unnecessarily complex."

The new draft also proposes reducing reporting requirements for banks and revising the mandate of the European Banking Authority, the EU sector's regulator, as part of efforts to improve the sector's competitiveness.

EU Banks Demand Changes

This would follow a similar move by the UK in 2023, which gave its main regulators a competitiveness mandate alongside ensuring sector stability, something many in the industry believe has helped make British financial supervisors more accountable for the impact of their rules on economic growth.

The industry has long demanded such a change in the EU, but this has met with opposition from supervisory authorities, including the ECB.

The draft also provides more details regarding an expected revision of a long-standing proposal for a European Deposit Insurance Scheme, which would provide a backstop to national schemes protecting customer deposits in the event of a bank failure.

The plan has been deadlocked for over a decade due to German opposition to the cross-border mutualization of losses in the event of bank failures.

Proposed EU Financial Regulation

Brussels aims to replace the deadlocked proposal with a system that will not provide full European insurance and, instead, will ensure that national deposit guarantee schemes have access to liquidity in a crisis.

The new proposal is designed to address countries' fears that the failure of a large bank headquartered abroad, but operating within their borders, could drain their national systems and require a taxpayer-funded bailout.

EU banks have long argued that the lack of a common deposit insurance system in the bloc has hindered cross-border consolidation because it makes national authorities more reluctant to allow the free flow of capital between bank subsidiaries in different member states. The draft report remains subject to changes.

Source: ink.com