ECB's 2025 simplification proposals can keep banks resilient, Vujčić argues

Boris Vujčić, drawing on his 13 years at the European Systemic Risk Board (ESRB), argues that simpler banking rules can achieve the same resilience as complex ones while improving competitiveness. His comments come as the European Central Bank has put forward concrete proposals to simplify capital, leverage, and resolution frameworks by the end of 2025.

Vujčić recalls that discussions about simpler regulatory frameworks began within the ESRB some 12 or 13 years ago, when Mark Carney was First Vice-Chair and Martin Hellwig chaired the Advisory Scientific Committee. He agrees that resilience does not necessarily require complex rules. The ESRB itself was established 15 years ago as the EU's macroprudential oversight body, a response to the global financial crisis following a 2009 recommendation by the de Larosière Group. Estimates place the median fiscal cost of a banking crisis at around 7% of GDP for advanced economies.

ECB’s 2025 proposals target capital, leverage, resolution and proportionality

The ECB's Governing Council proposed a set of high-level recommendations for simplifying the EU's regulatory, supervisory and reporting frameworks for banks at the end of last year. The proposals aim to streamline several key areas.

Stronger bank balance sheets reduce need for stringent capital rules

Vujčić notes that the current profitability and sound standing of euro area banks is a strategic advantage for Europe. He states that had banks entered the last financial crisis with today's stronger balance sheets, the resulting economic costs would have been considerably lower. This underlying strength, built up over the past decade, reduces the need for excessively stringent capital rules.

Industry and data suggest capital is not currently constraining lending

The banking industry frequently contends that the EU regulatory framework is too cautious, disadvantaging European banks and constraining credit provision to the real economy. Industry voices suggest lowering capital requirements to boost competitiveness.

Evidence from the euro area bank lending survey tells a different story. In recent years, banks have consistently reported that tighter credit standards primarily reflect their perceptions of risk, their tolerance for risk, and uncertainty about the economic outlook. Their capital positions are not the main driver. Current lending dynamics are more likely to reflect demand for credit, elevated uncertainty, and broader macroeconomic conditions than a shortage of regulatory capital.

Recent studies in favourable conditions show a limited impact of higher capital requirements on lending among well-capitalised banks. Such banks can absorb tighter requirements through retained earnings or by reducing voluntary buffers, limiting any need to cut credit supply. This suggests regulatory capital is not currently a binding constraint on lending. A reduction in requirements under current conditions would very unlikely materially increase lending.

Vujčić argues that the real hindrance to EU bank competitiveness is not regulation but insufficient financial integration. Cross-border bank lending to non-financial firms within the euro area accounts for only around 16% of total corporate lending. This is lower than the approximately 20% seen in lending to US and UK-based firms. The absence of a European deposit insurance scheme also remains a key missing piece of integration.

The ECB's supervisory arm is acting to streamline its own processes, discontinuing around 40 of over 100 guidance documents to make supervision more efficient, effective and risk-focused.