The European Central Bank (ECB) is deliberating whether to release an internal study showing that major EU banks would face a significant increase in capital requirements—potentially by a double-digit percentage—if subjected to US regulatory standards.
Several senior ECB officials are advocating for the publication of this report, or at least portions of its findings, to counter the intense lobbying efforts from the banking sector aimed at softening the implementation of the Basel III international capital standards.
The pressure from EU financial institutions is expected to mount, especially as the US may abandon or dilute plans to enforce Basel III regulations amid ongoing deregulation efforts following Donald Trump’s election victory. Basel III, developed after the 2008 financial crisis, seeks to curb banks’ ability to use their internal risk models to project a stronger financial position than warranted.
The unpublished ECB report, completed last year, analyzes the effects on EU banks if they were subject to the existing US regulatory framework. Two sources familiar with the report reveal that the biggest EU banks would see their minimum capital requirements rise significantly under these US rules.
Both EU and US banks are required to maintain extra capital buffers to mitigate risks related to their systemic importance and potential impact on global finance if they were to fail. For US banks, these include an annual Federal Reserve stress test buffer and an additional surcharge, supplementing the basic “pillar one” requirement of 4.5% of risk-weighted assets.
Concerns among some ECB officials about releasing the report stem from the use of assumptions that could be disputed by the banking industry, potentially sparking friction between banks and regulators. Additionally, parts of the report involve confidential data, making public release problematic.
The ECB has declined to comment on the report’s contents. Its findings were intended to challenge claims from the EU banking sector that it maintains higher capital levels than US peers, a key argument in lobbying efforts to weaken new capital requirements.
The European Banking Federation, collaborating with consulting firm Oliver Wyman, produced a report last year asserting that over the previous three years, large EU banks had average common equity tier one capital ratios 3.1 percentage points higher than those of major US banks.
EU banks’ higher capital ratios are partly due to their greater use of internal risk models, which can minimize perceived asset risk and inflate relative capital levels. Unlike in the EU, US banks face stricter limitations on employing such accounting strategies. Additionally, European banks tend to maintain larger management buffers above the regulatory minimums compared to US counterparts.
The new EU law to enforce Basel III, finalized this year, is set to be gradually phased in over the next eight years. The European Banking Authority estimates this law will increase minimum capital requirements for large, globally active EU banks by 8.6% and for the most systemically important banks by 12.2%.
EU lawmakers made concessions to various sectors, including lighter capital requirements for small business and mortgage lending, and for banks with insurance subsidiaries, to gain member state support.
Earlier this year, the Federal Reserve cut its proposed capital requirement increase for the largest US banks to 9% after backlash from the banking industry and political figures against the “Basel Endgame” regulations. Despite this reduction, US regulators failed to reach a consensus, and many bank executives now anticipate that a Trump-led administration will introduce a new regulatory team in Washington likely to weaken or abandon the Basel Endgame altogether.
Claudia Buch, chair of supervision at the ECB, emphasized in a recent event in Amsterdam that Europe should adhere to its Basel III implementation plan regardless of US actions. She pointed out that leading Wall Street banks already face “significantly higher capital requirements” than their European counterparts.
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