The European Central Bank plans to streamline the banking industry regulatory framework but explicitly refuses to lower capital buffer requirements.

The European Central Bank proposed a simplification of bank supervision on Thursday, planning to streamline the complex regulatory rules introduced after the global financial crisis, but without reducing the overall regulatory intensity. For a long time, the banking industry has been complaining about the heavy regulatory burden, while some countries, such as the United States, are pushing for relaxation of regulations and broader capital requirements in the name of limiting banking activities. However, the European Central Bank maintains its core position: simplifying rules does not equate to lowering capital requirements. The focus of Thursday's proposal is on reducing rather than lowering the capital buffers that banks must hold to prevent potential shocks. European Central Bank Vice President De Guindos stated: "Simplifying regulation should maintain the resilience of banks, and for us, the resilience of banks means capital levels. We have no intention of weakening the current capital position of European banks." Simplifying Levels Without Lowering Standards According to previous reports, the European Central Bank's primary proposal is to simplify the design of bank capital requirements and buffer systems. The European Central Bank plans to consolidate the existing multi-level capital buffers into two categories: non-releasable buffers and releasable buffers, with the latter being able to be adjusted downward by regulatory authorities in times of economic downturn. The new releasable buffer will integrate countercyclical capital buffers and systemic risk buffers, which are generally accumulated during periods of economic stability and released during economic downturns. It is worth noting that the non-mandatory second pillar guidance on capital levels will be kept separate and placed above the releasable buffer. According to a statement from the European Central Bank, it also plans to reduce the components of the leverage ratio framework from four to two, including a minimum leverage ratio requirement of 3% and a single buffer amount. For small banks, this single buffer amount can be set at zero. Additionally, the European Central Bank proposed expanding the applicability of the "small bank regulatory framework", allowing more banks to be included in the category of simplified regulatory requirements. Encouraging Contingent Convertibles Reform? De Guindos stated that the European Central Bank also has doubts about the loss-absorption capacity of contingent convertible bonds known as Additional Tier 1 (AT1) instruments. This is because banks rarely actually use such instruments to absorb losses, so they should be reformed to make their characteristics more akin to equity. These financial instruments drew widespread attention in 2023 when Credit Suisse fully wrote down CHF 16.5 billion worth of AT1 bonds in a government-led transaction for its acquisition by rival UBS. Although a Swiss court later ruled the write-down illegal, related appeals are still pending. De Guindos emphasized: "We can enhance the loss-absorption capacity of these instruments, ultimately, AT1 instruments should be more equity-like." The European Central Bank has proposed two reform alternatives: the first is to optimize the design of AT1 instruments to further protect their loss-absorption capacity without changing their fundamental purpose; The second is a more radical approach, which is to completely remove AT1 instruments from the capital buffer system during ongoing banking operations. However, the European Central Bank pointed out that this approach may not comply with relevant Basel agreements, violate the principle of regulatory simplification, and lead to changes in regulatory capital requirements. De Guindos stated that the European Central Bank's regulatory specialist working group supports both of the above proposals. Sources revealed that this stance also indicates a divergence in positions between France and Germany on the issue. Meanwhile, the European Central Bank also called for a reform of the coverage and methodology of banking stress tests within the European Union, making them more valuable for both individual banks and from a systemic risk perspective. These suggestions have been approved by the European Central Bank's Governing Council and will be submitted for review by the European Commission. Any actual policy adjustments, even if implemented, may take several months or even years. De Guindos stated: "This will be the starting point for our negotiations with the legislative bodies. We are not a legislative body and can only provide policy recommendations to them."