European banking sector capital faces easing? The European Central Bank has put forward a reform plan in hopes of reshaping international competitiveness through "regulatory relief".

The European Central Bank formally submitted a package of banking reform proposals to the European Commission on April 14th, demanding greater authority to set overall capital requirements for banks, including evaluating the capital buffers set by national regulators, in order to eliminate regulatory overlaps and blind spots. This move marks a crucial step for the European Central Bank in advancing the process of integrated supervision of the banking industry in the eurozone. According to a statement released by the European Central Bank, a total of 17 reform proposals were submitted, aimed at helping EU banks compete more effectively with rivals in the US and other regions. The proposal on "overall capital requirements assessment authority" was the most controversial and received unanimous endorsement from all eurozone central banks. In the statement, Luis de Guindos, Vice President of the European Central Bank, said, "Eurozone central banks are united in the view that a key step towards strengthening European competitiveness is to establish a truly unified banking market, allowing capital and liquidity to flow freely across borders, and ensuring equal protection for all deposits." Power redistribution, simplifying regulation to enhance international competitiveness The European Central Bank explicitly proposed giving its governing council the responsibility to conduct a comprehensive assessment of the overall capital requirements within banking alliances and across alliances. The assessment will be carried out jointly by central bank policy-makers and senior supervisors, but the specific execution of assessment results was not mentioned. Currently, the eurozone banking capital requirements system exhibits significant dual characteristics: around 110 "significant institutions" directly supervised by the European Central Bank have capital requirements set by the central bank, while smaller banks are mainly subject to the decisions of national regulatory authorities. The European Central Bank believes that this divided supervision leads to inefficient capital allocation for cross-border banking groups - according to Bloomberg, around 230 billion euros of high-liquidity assets in the eurozone banking system are locked up due to regulatory requirements imposed by various subsidiary banks, with a similar amount of capital trapped behind regulatory barriers. Regulatory preparations for this proposal were made earlier. In December 2025, the European Central Bank's high-level simplification working group had already included the "overall coordination of capital requirements" in the reform agenda. Claudia Buch, Chair of the European Central Bank's Supervisory Board, emphasized at a recent hearing in the European Parliament that the overall core equity Tier 1 capital adequacy ratio for eurozone banks is around 16%, with asset quality remaining stable, but medium to long-term risks remain elevated. Proposals to slim down the countercyclical buffer could release bank capital In addition to restructuring the capital discourse, the European Central Bank reiterated its call for simplifying the macroprudential policy toolbox. Under the current framework, banks must meet five buffer requirements simultaneously: capital conservation buffer, global systemically important institution buffer, other systemically important institutions buffer, countercyclical capital buffer, and systemic risk buffer. The European Central Bank proposed merging these five into two, arguing that the complex buffer system increases regulatory uncertainty without significantly enhancing financial stability effectiveness. This proposal continues the streamlined approach under the Basel III framework but emphasizes the position that "simplification must reduce unnecessary complexity, not resilience." Other key recommendations include clarifying the legal status of convertible bonds, expanding the scope of simplified regulatory systems for small banks, promoting the use of directly applicable "regulations" to replace directives that require national transposition to enhance legal consistency. The central bank also mentioned reducing elements in the risk-weighted and leverage ratio frameworks. Based on the current state of capital adequacy, the eurozone banks have a weighted average core Tier 1 capital adequacy ratio of 16.1%, significantly higher than the combined level of regulatory requirements and guidelines at 11.2%. There is no short-term pressure on capital tightening, with reforms focusing more on medium to long-term institutional optimization. In the medium term, if the "overall capital assessment authority" is implemented, the capital allocation efficiency for cross-border banks may improve, while streamlined buffer systems will reduce regulatory complexity and compliance costs. Among them, large European banks operating across borders may be the main beneficiaries - under a unified assessment framework, capital redundancies caused by national regulatory differences are expected to be released. Meanwhile, eligible small banks will benefit from a simplified prudential framework, less frequent regulatory reviews, simplified reporting requirements, and may only need to meet either risk-weighted capital requirements or leverage ratio requirements, eliminating the need for dual compliance. For the eurozone's large number of regional banks and savings banks, the benefits of this reform direction are more direct. Constraints remain, obstacles in implementing suggestions The stagnation of the European Deposit Insurance Scheme represents the biggest institutional hurdle for the banking alliance. Unified coordination of capital requirements is difficult to advance in isolation without a deposit insurance mechanism in place. Member countries' limited willingness to cede sovereignty and resistance from core member states like Germany to risk sharing have yet to loosen, highlighting the significant tension between the European Central Bank's ambitions and the actual political feasibility. The European Central Bank called for "simultaneously advancing key components of the banking alliance" in the proposals and requested a clear timetable for the establishment of the European Deposit Insurance Scheme. The interests involved in the integration of regulations have far-reaching implications: granting the European Central Bank the authority to assess the capital requirements set by national regulators essentially transfers some prudential regulatory sovereignty from member countries to supranational institutions. Legal experts have commented that if the 17 proposals are adopted, the eurozone's banking regulatory architecture will undergo the most profound changes since the launch of the Single Supervisory Mechanism in 2014. However, in the context of limited willingness to cede sovereignty among member countries and increasing geopolitical-economic uncertainties, there is a clear tension between the European Central Bank's ambitions and the actual political feasibility.