LONDON (Business Emerge Latest): A new set of recommendations released by the European Central Bank on Thursday presented a restructuring of capital buffer rules for European lenders. The proposal seeks to simplify the current framework without lowering the amount of capital that banks are required to maintain.
The ECB detailed the plan during a regulatory update that focused on capital structure, supervisory layers and future stress test design. The document noted that the framework would only be adjusted for clarity and efficiency, not for reducing required cushions.
Under the plan, the ECB has outlined a redesigned capital stack built around two core buffers. The system would combine several existing layers into a releasable buffer and a non-releasable buffer. The releasable element would bring together the countercyclical buffer and the systemic risk buffer, both of which are normally built up during stable periods and used during downturns. A separate element known as Pillar 2 guidance would continue to sit outside this merged structure.
The proposal also includes changes to leverage rules. The ECB suggested shifting from four components to two, featuring a minimum leverage ratio of three percent and a single leverage buffer. The redesigned buffer could be set to zero for institutions that meet the size criteria for simplified oversight. In addition, the ECB recommended expanding the small banks category so that more lenders can access a streamlined supervisory regime.
The update also addressed a category of convertible bonds known as Additional Tier 1 instruments. The ECB noted that their function as loss absorbing tools has faced scrutiny, particularly after a major European lender cancelled a large issuance of these instruments during a takeover process in 2023. The recommendations outlined two possible directions. One option would strengthen the way these instruments absorb losses while retaining their current role. The other would remove them entirely from going concern capital structures, although this could conflict with Basel standards and alter the calculation of regulatory capital.
Further changes were proposed for continent-wide stress testing. The ECB indicated that the scope and methodology of the tests should be revisited so that the results offer clearer value for individual institutions and for oversight of the broader system.
The recommendations were approved by the ECB’s Governing Council and will now move to the European Commission for assessment. Any updates to European banking rules will require a formal review process that may extend over an extended timeline.
