Vujčić backs simpler EU bank rules but rejects cutting capital to compete
Serguey Asael Shinder2 min readECB Vice-President Boris Vujčić used a keynote at the European Systemic Risk Board's annual conference on 2 October to take on a central claim in the debate about European banks: that lower capital requirements would make them more competitive. He supported making the rules simpler, but not weaker.
The case for simplification. Vujčić said complying with EU banking rules has become complicated and burdensome and that there is a clear case for simplifying them, adding that the same resilience can often be reached with simpler rules. He recalled the ECB Governing Council's recommendations from late last year:
- merge the capital buffers into two — a non-releasable buffer combining the conservation buffer and the systemic-institution buffers, and a releasable one combining the countercyclical and systemic risk buffers;
- reduce the leverage ratio framework to a 3% minimum plus a single leverage buffer;
- bring the EU's MREL resolution requirements closer to the international TLAC standard, without reducing the resources available in resolution;
- create a simpler, more conservatively calibrated regime for smaller banks.
He noted that ECB supervision is also dropping about 40 of more than 100 guidance documents.
The case against lower capital. The evidence Vujčić set out runs the other way from the industry's argument. The median Tier 1 ratio of euro area banks has more than doubled, from about 8% in 2009 to over 16%. Return on equity has risen since the pandemic to historical highs, and the average price-to-book ratio, long below 1, is now around 1.5. Retained earnings have been the main source of new capital, and aggregate capital headroom has kept growing. Studies from the years right after the financial crisis found higher requirements cut lending, he said, but more recent work in better conditions finds a much smaller effect on well-capitalised banks. His conclusion: regulatory capital is not currently a binding constraint on lending, and banks in the ECB's lending survey attribute tighter standards mainly to risk perceptions. Estimates put the median fiscal cost of a banking crisis at about 7% of GDP in advanced economies, he noted, before counting lost output.
What would make banks more competitive, in his view, is financial integration in a true single market that lets them gain economies of scale.
What it means
The speech draws a line the ECB is likely to hold in the coming EU legislative debate: fewer and simpler buffers are negotiable, a lower overall level of capital is not. Investors in euro area bank shares should read the simplification agenda as a change in form rather than a release of capital.