The European Central Bank (ECB) has rejected calls from Europe’s banking sector to relax capital requirements, which would increase lending and put them on equal footing with American banks. The ECB was responding to a report from the European Banking Federation and consultants Oliver Wyman, which stated that while international banking regulations are coordinated globally, there remain differences in how these regulations are implemented. The report claims that relaxing current capital requirements and supervisory processes could result in an additional 4-4.5 trillion euros of lending.
The report further suggests that the difference in regulatory-induced costs between European Union (EU) and US banks could explain a 0.8-1.0 percentage point gap in return on equity. The report also called for efforts to complete the banking and capital markets unions in the EU, with banks focusing on operational efficiency and digitization.
The ECB countered these claims by stating that EU banks are not at a disadvantage compared to US banks, with regulatory requirements being “broadly comparable.” The ECB also noted that the largest global European banks even have slightly lower requirements compared to their US counterparts. The ECB went on to say that lower capital requirements do not necessarily lead to increased lending, and instead, low levels of capital can lead to banks reducing lending during a crisis.
The ECB remains open to discussions with the industry on how supervisory processes can be further improved. The EU is in the process of finalizing the remaining global bank capital rules, written in response to the 2008 financial crisis. The ECB’s top banking supervisor, Andrea Enria, stated that the main issue for banks is their subdued profitability, and rising interest rates may help to alleviate the problem.
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