Estimated reading time: 2 minutes
A sensitive internal report at the European Central Bank (ECB) has sparked debate among Frankfurt officials. Its findings suggest that major EU banks would face substantially higher capital requirements if held to the same standards as their American counterparts.
The unpublished report, completed last year, indicates that the EU’s largest banks would need to increase their minimum capital levels by a double-digit percentage were they to operate under current US prudential rules.
European banks have been resistant to the global Basel banking regulations, centring on the Basel III framework. Their apprehension is expected to grow louder once Donald Trump takes office in January, with his promise of massive deregulation.
The unreleased ECB report goes against precedent understanding. A report produced by the European Banking Federation and Oliver Wyman consultants highlighted that Basel III enhancements were predicted to constrain EU banks’ use of internal models and increase minimum tier-one capital by 15% on average, compared to a 5-10% rise for US banks already subject to stricter rules.
Larger EU banks were also reported as maintaining higher capital levels than US rivals, with common equity tier-one ratios averaging 3.1 percentage points above their American counterparts over the past three years.
However, experts note that European banks achieve these higher ratios partly through greater utilisation of internal models to assess risk-weighted assets—a practice more strictly controlled in the US. European institutions also typically maintain larger management buffers above minimum requirements compared to US banks.
Several policymakers are advocating for the ECB report’s publication to counter the banking industry’s aggressive lobbying efforts; others expressed concern about the report’s methodological assumptions, which could trigger disputes with the banking sector.
The European Banking Authority (EBA) projects a 9.9% increase in tier-one capital requirements for EU banks under new proposals (or 5.6% with transitional arrangements). In contrast, the Prudential Regulation Authority (PRA) expects tier-one capital requirements for major UK banks to rise by less than 1% until 2030.
Brussels has already made several concessions to the industry, including reduced capital requirements for small business and mortgage lending and for banks’ insurance subsidiaries. However, the ECB’s unreleased report suggests that despite these adjustments, European banks continue to operate with lower capital requirements than their US counterparts.
