Finance
ECB proposes simpler bank regulation but rejects calls for lower buffers
Published by Global Banking and Finance Review
Posted on December 11, 2025
Last updated: January 7, 2026
Global Banking and Finance Review
Company
Published by Global Banking and Finance Review
Posted on December 11, 2025
Last updated: January 7, 2026
By Balazs Koranyi
FRANKFURT, Dec 11 (Reuters) - The European Central Bank proposed a simplification of bank regulation on Thursday, looking to prune a complex rulebook put in place after the global financial crisis without easing the overall regulatory burden.
Banks have long complained the supervision has become onerous and others, particularly the United States, are now pushing to cut regulation and soften capital rules on the premise that the supervision constrains bank activity.
But the ECB stuck to its promise that simplification cannot mean lower capital requirements and Thursday's proposals are focused on fewer -- rather than lower -- capital buffers lenders must hold to cushion against potential shocks.
"Simplification efforts should maintain banks' resilience and by banks' resilience, we mean the level of capital," ECB Vice President Luis de Guindos said. "We do not want to try to undermine the present situation of capital of the European banks."
FEWER BUT NOT LOWER
The ECB's number one recommendation is to simplify the design of banks' capital requirements and buffers, called the capital stack, as Reuters reported earlier.
The ECB aims to merge existing layers of buffers into just two: a non-releasable and a releasable buffer which authorities can lower in bad times.
The new releasable buffer would result from merging the countercyclical capital buffer with the systemic risk buffer, which are normally built up during tranquil periods and released during downturns.
However, the non-binding Pillar 2 guidance on capital levels would be kept separate, on top of the releasable buffer.
The ECB also wants to reduce the leverage ratio framework from four elements to two, to include a 3% minimum requirement and a single buffer, which could be set to zero for smaller banks, the bank said in a statement.
The ECB also proposed expanding the so-called 'small banks regime' so more lenders would fall under simpler supervision requirements.
CONVERTIBLE BOND REFORM?
The ECB also argued that the loss-absorbing capacity of convertible bonds called Additional Tier 1 (AT1) instruments is questionable, because banks rarely use these to actually absorb losses and it should be reformed in a way that it is closer to equity, de Guindos said.
Such instruments made headlines in 2023 when Credit Suisse wiped out 16.5 billion francs worth of such bonds during the state-engineered takeover by its rival UBS. The move was later ruled illegal by a Swiss court, though an appeal is still pending.
"You can improve the loss absorption capacity and what we are saying, at the end of the day, is that AT1s should be closer to equity."
In proposing two alternatives, AT1 instruments could be enhanced to further ensure their loss absorption capacity but the role of the instrument itself would not be modified.
Under a "more radical" alternative, it could be completely removed from the going-concern capital stack but that may not be compliant with Basel rules, may go against the principles of simplification and would lead to changes in the regulatory capital demand, the ECB said.
Still, both proposals had support in the ECB's task force looking through regulation, de Guindos said, a nod to differences between French and German views, according to sources close to the discussion.
The ECB also called for a reform of the scope and methodology of EU-wide bank stress tests to make them more useful both for the bank and from a systemic perspective.
The recommendations, endorsed by the ECB's Governing Council, will now be presented to the European Commission for consideration and any actual change could still take months if not years.
"This will be the starting point of the discussion that we will have with the legislators," de Guindos said. "We are not the legislators, we can make proposals to them."
For a factbox on specific measures, click here.
(Reporting by Balazs Koranyi; Editing by Toby Chopra, William Maclean)
The European Central Bank (ECB) is the central bank for the eurozone, responsible for monetary policy, maintaining price stability, and overseeing the financial system within the Euro area.
Capital requirements are regulations that require banks to hold a certain amount of capital to cover their risks and ensure stability in the financial system.
A capital buffer is an extra layer of capital that banks hold above the minimum requirements to absorb potential losses during financial stress.
Convertible bonds are hybrid securities that can be converted into a predetermined number of the company's equity shares, providing investors with the potential for capital appreciation.
Stress tests are simulations used to determine a bank's ability to withstand economic shocks by assessing its financial stability under adverse conditions.
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