Sharon Donnery, a member of the European Central Bank’s banking supervisory board, has said the current drive to simplify banking regulation must not sacrifice the level of resilience built up in the system since the financial crash more than a decade and a half ago.
The Irishwoman is the supervisory board’s representative on a high-level ECB taskforce set up earlier this year to develop simplification proposals for banking supervision – as part of a wider push by the European Commission to streamline policies and laws to make the European Union more competitive.
The seven-member taskforce will deliver its recommendations by the end of the year to the ECB governing council. If they are endorsed, they will be sent to the commission for consideration.
“[Simplification] means making supervision more transparent – and therefore simpler to understand – more proportionate and more efficient, while safeguarding the resilience we have worked so hard to build,” said Ms Donnery in a blog published on the ECB’s banking supervision website this week.
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The former Central Bank of Ireland deputy governor added: “Simplification must not entail weakening the framework and exposing the banking system – and ultimately the European public – to renewed dangers and risks.”
While the UK government and the Trump administration in the United States are currently seeking to water down some regulations introduced following the 2008 financial crisis, European banking lobby groups have been careful in the current debate not to push for deregulation or an easing of bank capital or liquidity requirements, as there is no such appetite among European regulators and politicians.
European Banking Federation (EBF) president Slawomir Krupa said in an interview during the summer that “no one in Europe is advocating deregulation”. However, he said the “highly complex ‘capital layer cake’ system imposed on banks by multiple national and European authorities” leads to double counting, increased complexity and makes the system harder to manage.
Domestic regulators in Europe can impose requirements on banks to hold layers of capital to absorb certain unforeseen risks that are in addition to those directed by the ECB banking supervision team. These include so-called countercyclical capital buffers and systemic risk buffers.
Bloomberg reported on Tuesday that German officials are pushing few capital buffers in future and a clear segregation of capital reserves that serves a bank while it is still operating and reserves that are used only for resolving a failed lender.
Under the current regime, banks can meet their main capital requirements broadly through three elements. Common equity Tier 1 capital, plus additional Tier 1 debt that can be bailed in during a crisis, and some Tier 2 capital, which includes preferred shares and subordinated debt.
There are also proposals for an even simpler capital regime for smaller banks, similar to an initiative that is being advanced in the UK, and fewer banks to be labelled systemically important institutions and fall under direct supervision of the ECB.
Ms Donnery said the resilience built up by euro-zone banks was demonstrated during the Covid-19 crisis and the banking turmoil of Mach 2023, which saw a number of US regional banks implode and Switzerland’s Credit Suisse being rescued by rival UBS.
“However, in a rapidly evolving environment, supervision must continue to adapt. Becoming more efficient, effective and risk-focused is crucial if we are to meet new challenges, including the digitalisation of finance and heightened geopolitical risks, within the constraints of finite resources,” she said.
“These goals are the focus of our next phase of supervision. But let’s be clear: they must not come at the cost of resilience. Resilience remains central to our mandate to ensure the safety and stability of the European banking system.”
