New study stresses urgent need for regulatory capital efficiency

x

Since the beginning of the regulatory reform in 2010, the European banking system has achieved a level of resilience far beyond the original targets. In 2024, all the capital, own funds and liquidity ratios of European banks have reached levels way above the minimum requirements.

In addition to the strong level of quantitative prudential metrics, significant safeguards have been built up in the European banking sector during the last decade including the EU Single Rulebook developed by the EBA, the unified supervision by the ECB’s Single Supervisory Mechanism, the operationalisation of the bank recovery and resolution framework under the Single Resolution Mechanism and the fast-track contribution of banks to the Single Resolution Fund (SRF)[1]. Also, the EU banking industry successfully clears the most severe stress tests and real-life stress events, supported by this framework that European policymakers put in place during the regulatory reform.

However, the EU regulatory framework has become particularly complex. And despite the large level of resilience achieved, European banks operate under a permanent flux of ever rising capital requirements stemming from changing EU regulation, national authorities’ discretions and supervisory decisions. In a short time frame, the regulatory requirements can change, the capital buffers can be significantly increased upon decision of different authorities absent any idiosyncratic justifications, and the supervisory expectations regularly add pressure to the already enhanced requirements. Such complexity has given way to gold plating of international standards and duplication of measures to address the same risk. As a result, capital planning in European banks is a conundrum.

Bank capital is a key resource to support the European economy and the competitiveness of European businesses. Regulatory capital levels achieved by EU banks now exceed the optimum balance between financial stability and benefits for the economy; in other words, now the marginal contribution to resilience through enhanced capital requirements is no longer compensated by the long-term economic cost derived from constrained financing volumes. At a time when the EU economy is facing increasing financing needs for the green transition, the digital transformation and the competitiveness of EU businesses at global level, it is imperative to avoid trapping bank resources vastly in excess of the global minimum requirements applied by peer world regions or exceeding the intentions of the Level 1 rules agreed by EU co-legislators.

In this context of enhanced and fragmented capital requirements, The European Banking Federation wanted to know how much of the aggregate capital requirement corresponds to the Basel Committee minimum, and how much is the result of discretionary decisions and gold-plating of the multiple EU and national authorities involved in the complex regulatory and supervisory EU framework. The former is referred to as the “Basel Baseline”. The latter is referred to as the “Supervisory Discretion”, or “capital add-ons”. For that purpose, it asked the Global Benchmark Initiative (GBI) of the Global Association of Risk Professionals (GARP) to conduct a fact-based study to inform about:

• The relative size of the mandatory Basel Baseline and of the EU capital add-ons
• The trend of the capital add-ons part from 2021 to 2024
• An estimation of the amount of lending that the capital add-ons part has prevented.

The exercise has been conducted in April and May of 2025 with the participation of 15 EU banks representing 66.4% of the EU banking assets. GARP GBI collected publicly available data and the banks submitted capital buffer, supervisory capital provisioning and deduction data for year-end 2024, 2023, 2022 and 2021 using a bespoke template.

Three conclusions stand out:

1. In 2024, at CET1 level the relative size of EU capital add-ons is very significant increasing the Basel baseline by 67%.
2. Such Supervisory discretions represent an incremental CET1 capital requirement of €273.2 billion, impacting financing capacity by an estimated €1.9 to €2.7 trillion
3. While the Basel baseline has remained stable between 2021 and 2024, the supervisory discretion has increased by more than €100 billion or 60% during the same period

It is remarkable that such increase has absorbed a significant part of the organic growth capital generation of banks over the period, calculated as the aggregate Net Income post shareholders returns, hence curtailing the ability of banks to invest and to grow their balance sheet and profitability.

Against this background, the EBF calls policymakers to pause the upward trend of increasing capital requirements, streamline the capital regulatory framework eliminating fragmentation and duplications and, ultimately make a more efficient use of the capital resources available to the banking system which determine, to a large extent, the availability of credit to the economy at a time when the financing needs are projected to increase significantly if Europe is serious about closing the competitiveness gap with its competitors.

[1] Contributions of banks to the SRF amounted to 80 billion euro at the end of 2024

For more information:

Gonzalo Gasós, Senior Director of Prudential Policy & Supervision – g.gasos@ebf.eu

About the EBF:

The European Banking Federation is the voice of the European banking sector, bringing together national banking associations from across Europe. The federation is committed to a thriving European economy that is underpinned by a stable, secure, and inclusive financial ecosystem, and to a flourishing society where financing is available to fund the dreams of citizens, businesses and innovators everywhere.