EU bank capital rules comparable, US stricter for large banks
An ECB Occasional Paper evaluates the EU banking sector capital framework and its implementation of Basel standards. It finds EU requirements broadly comparable to international norms, but notes US rules would be stricter for the largest EU banks and less stringent for mid-sized ones.
EU rules: Basel-aligned, US-divergent
The paper quantifies the capital impact of EU-specific regulatory choices, supervisory measures, and macroprudential policies.
Most EU capital requirements stem from prescriptive Basel standards, with non-prescriptive elements accounting for about one-third of total requirements.
"Super-equivalences" (stricter than Basel) and "deviations" (less strict) have a limited impact, challenging claims of systemic "gold-plating.
" A model-based counterfactual compares EU banks' capital requirements with current US rules.
For the largest EU banks, US rules would entail stricter requirements, driven by the US approach for global systemically important banks and limitations on internal models.
Conversely, mid-sized EU banks would face less stringent requirements under the US framework, due to the absence of certain EU capital add-ons and the US practice of setting the countercyclical buffer at zero.
Overall, EU capital requirements are broadly comparable to other jurisdictions and international standards.
A decade of capital build-up
The EU's implementation of international banking standards features a Single Rulebook adapted for a diverse banking sector and a multi-level supervisory framework under the Single Supervisory Mechanism (SSM).
This includes the Supervisory Review and Evaluation Process (SREP), bank-specific Pillar 2 requirements, and a decentralized macroprudential framework.
Since the SSM's inception, banks have significantly strengthened their capital positions, with CET1 and Tier 1 ratios rising markedly.
Aggregate requirements increased during the initial Basel III phase-in, temporarily fell during the pandemic due to buffer releases, and have since returned to pre-pandemic levels, partly due to increases in macroprudential buffers.
The initial impact of final Basel III reforms has been muted, with the fully phased-in "output floor" expected to have a limited average impact through 2030.
Beyond the numbers: Stability vs. growth
The paper effectively debunks claims of systemic "gold-plating" in EU capital rules, providing data-driven insights into their actual impact.
Its cautious approach to interpreting bank performance indicators underscores the ongoing debate on balancing financial stability with economic growth.
This highlights the persistent tension between national specificities and the broader objective of consistent global regulatory harmonization.