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ECB softens capital requirement position

ECB softens capital requirement position

(22 February 2016 – Europe) The European Central Bank (ECB) has indicated that it will curb demands on European banks capital requirements.

In an announcement last week, the European regulator said it will decrease its demands for capital at the same rate as another buffer is phased in over the coming four years, Korbinian Ibel, the ECB’s director-general for micro-prudential supervision, told journalists on Friday.

The ECB will expect banks to ensure they have common equity capital equivalent to about 10 percent on average of risk-weighted assets, he said.

“All things being equal, the capital requirements we have now we find satisfying,” Ibel said. The ECB’s next supervisory review cycle may put more emphasis on banks’ liquidity and funding situations, he said.

European banks have increased common equity Tier 1 (CET1) capital to 13 percent from 9 percent in 2010, allowing authorities to scale back demands, according to the ECB’s supervisory head Daniele Nouy.

The central bank is reviewing the banks under its remit in what it calls the Supervisory Review and Evaluation Process, or SREP. Using a scoring system for business models, governance, risk management, liquidity and funding, as well as capital, it then calculates an additional amount to be added on to the minimum requirements faced by all banks.

In addition to the two classes of pillars, are three capital “buffer” levels. Every bank must adhere to capital conservation buffers, systemic risk buffers apply only to the world’s biggest banks, eight of which are supervised by the ECB; and a countercyclical buffer – set when state regulators consider it needed.

According to Ibel, both Pillar 1 and 2 requirements “have to be kept at all times.” This means regulators are able to enforce sanctions including revocation of banking license, sacking management, or calling emergency shareholder meetings.

Buffers are meant to be used in times of crisis, hence considered a ‘softer’ requirement. A breach of one of the buffers may result in restrictions on banks’ ability to pay dividends, bonuses and coupons on contingent convertible bonds, or CoCos.

Ibel said the main reason for switching the Pillar 2 requirement with the buffer was that some Euro members already apply the full conservation buffer (2.5 percent), which would have put banks in those countries at a disadvantage.

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