Market integration drives bank competitiveness over capital relief
European banks must achieve scale through cross-border financial integration and simpler regulation rather than reduced capital requirements. Speaking at the European Systemic Risk Board's 15th anniversary, officials defended current capital buffers as a foundation for economic resilience.
Two buffers instead of four
Euro area bank capital positions have strengthened since 2009, with the median Tier 1 ratio doubling from 8 percent to over 16 percent.
Return on equity has rebounded since the pandemic, pushing price-to-book ratios from below parity to 1.5. To maintain this stability while curbing complexity, the ECB framework proposes streamlining capital buffers into two categories: a non-releasable buffer and a releasable buffer.
The leverage ratio rules are simplified to a 3 percent minimum plus a single buffer, alongside closer alignment between MREL and TLAC rules.
Furthermore, European banking supervision will withdraw 40 out of more than 100 supervisory guidance documents.
The cross-border barrier
Cross-border lending to euro area non-financial firms accounts for only 16 percent of total corporate lending, reflecting persistent market fragmentation.
Mergers and acquisitions remain largely domestic, limiting the scale of European institutions.
In capital markets, banks lag US competitors due to legal disparities, including 27 distinct withholding tax regimes and diverging insolvency laws.
Completing the banking union via a European deposit insurance scheme and expanding funded pensions represent the primary mechanisms to unlock cross-border depth.
Right diagnosis, stalled delivery
Resisting bank lobbying for lower capital requirements rightly preserves hard-won stability.
Yet outsourcing competitiveness to stalled political projects like deposit insurance provides no near-term remedy.
Until member states surrender national vetoes over banking markets, European lenders will remain hobbled by fragmentation.