As the European Banking Authority gets set to release the results of the latest stress tests on 51 major EU banks, EPRS looks at the developing rules on capital requirements for financial institutions in the EU.
Capital and liquidity requirements are provisions to make banking activities safer through measures to cover a firm’s unexpected losses as well as to fund its ongoing activities. The supervision of financial institutions is benchmarked against international standards (Basel III), set by the Basel Committee on Banking Supervision (BCBS). These non-binding provisions are transposed into EU norms through the Capital Requirements Directive and Regulation (CRD-IV/CRR – the ‘CRD-IV package’).
Current data suggest a limited overall negative impact of increased capital requirements on bank lending. Considering the long-term benefits, an appropriate increase in capital requirements appears to be positive.
Equally, at international level, the Financial Stability Board (FSB) has developed resolution standards for globally systemically important banks (G-SIBs), requiring even higher buffers. Known as Total Loss Absorption Capacity (TLAC), this will enter into force after 2019. In parallel, the EU Banking Union’s single resolution mechanism (SRM) is currently finalising its own loss-absorption rules: minimum requirement for own funds and eligible liabilities (MREL), which are required by the Bank Recovery and Resolution Directive (BRRD). The European Commission is currently making efforts to align these different provisions and to reduce the complexity for the banking sector.
At the same time, with remaining high political risk within the euro area and unparalleled ultra-low interest rates, challenges remain. These include sovereign risk, the provision of state aid to banks and the upcoming revision of the CRD-IV package, including proposals to standardise models for risk-weighted assets.
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