Dossier
Strong Banks
Our goal: To simplify banking regulation in Europe and strengthen competitiveness.
Competitiveness is the foundation of European sovereignty. It underpins our ability to defend ourselves, to expand modern infrastructure, to drive the digital transformation and transition to a sustainable economy. Banks play a central role in making this possible. The regulatory framework determines how much capital banks can provide and, ultimately, whether political ambitions can be translated into economic reality. And this is why capital requirements for European banks must not increase any further. The Association of German Banks therefore advocates simplifying banking regulation in Europe and ensuring that supervision supports competitiveness.
Key points at a glance
- Banks are the engine of growth and innovation.
- Stability remains vital, but regulation must not put Europe at a competitive disadvantage.
- Competitiveness is the foundation of European sovereignty.
- Further increases in capital requirements must be halted, as growth requires scope for lending and investment.
- Europe needs a regulatory approach geared towards competitiveness.
- Key financial market regulations can be simplified without compromising stability.
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Where do we stand?
Europe faces major challenges. Our continent must mobilise all available resources to strengthen its resilience and shake off the economic stagnation of recent years.
Competitiveness is the foundation of European sovereignty
It underpins the ability to defend ourselves, to expand modern infrastructure, to drive the digital transformation and transition to a sustainable economy. According to estimates by the European Central Bank, the EU will need to invest more than €5 trillion by 2031 to achieve these goals. Banks play a central role in making this possible. They finance investment, innovation and growth in the real economy thereby making a significant contribution to the success of these policy objectives. At the same time, one point should not be overlooked: access to the financial services provided by European and German banks is itself an element of sovereignty.
Political objectives and the regulatory framework must be aligned
The regulatory framework determines how much capital banks can provide and, ultimately, whether political objectives can be backed by the necessary funding. Other major economies are acting accordingly. In the United States, regulatory adjustments are estimated to have released up to US$169 billion in capital, unlocking around US$2.5 trillion in additional financing capacity (Alvarez & Marsal study). This capital is being made available specifically to support economic and industrial policy priorities.
Additional capital requirements undermine Europe’s strategic capacity to act
As a result, Europe's regulatory approach is increasingly diverging from those adopted elsewhere in the world. The improved profitability of European banks should not distract from the significant shift in the balance of power in global finance away from Europe since the 2008 financial crisis. Without strategic adjustments, this trend is likely to continue, putting the implementation of key policy objectives at risk. It is therefore encouraging that Europe is now showing a growing willingness to confront these challenges head-on and act quickly.
Europe needs a regulatory approach geared towards competitiveness and clear priorities
This approach must enable effective short-term adjustments while also laying the groundwork for a broader reform of Europe’s regulatory and supervisory framework. Above all, any further increases in capital requirements must be stopped. Growth requires scope for lending and investment in the real economy, not banks having to set aside additional resources to meet ever higher capital requirements. Banking regulation therefore has a direct impact on industrial policy. Europe needs targeted regulatory adjustments that strengthen its competitiveness and strategic autonomy while taking account of Europe’s specific characteristics. The regulatory framework must also be applied more purposefully, with greater emphasis on risk-benefit considerations and proportionality.
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What the Association of German Banks is calling for
Some measures could be implemented quickly and deliver significant benefits. In particular, the European Commission should present concrete proposals and a binding timetable as part of its competitiveness agenda before the end of the year.
Quick fixes
Make the temporary Basel III transitional arrangements permanent
Exclude software assets from regulatory capital deductions
Apply the NPL backstop only to banks with an NPL ratio above 5%
Retain the current trading book boundary
Exclude central bank reserves from the leverage ratio
Adopt a narrower and more risk-sensitive definition of leveraged lending
Risk-mitigating treatment of collateral
Allow fee income and expenses to be offset in operational risk capital requirements
Areas requiring more comprehensive reform
Undertake a fundamental overhaul of the market risk framework (FRTB)
Introduce a dedicated regulatory regime for small banks
Simplify and streamline the capital buffer framework
Apply liquidity requirements across banking groups at group level
Align regulation more closely with underlying risks, taking account of risk-benefit considerations and the principle of proportionality
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FAQ
Competitiveness is the foundation of European sovereignty. It underpins defence capabilities, infrastructure investment, digitalisation and the transition to a sustainable economy. Without competitiveness, key policy objectives cannot be financed or implemented.
Competitiveness in the banking sector describes the banks’ ability to provide capital efficiently and support economic development in an international environment. It depends to a large extent on the regulatory framework and the scope banks have for lending and investment.
The regulatory framework determines how much capital banks can provide for lending and investment. As a result, banking regulation has a direct impact on the extent to which economic and political objectives can be financed.
Higher capital requirements mean banks must hold more capital, reducing the scope for lending and investment, particularly for businesses and projects that support growth, transformation and infrastructure.
The Basel III transitional arrangements provide temporary relief as new capital requirements are phased in. Key elements of these arrangements will expire by 2033. Once they expire, banks will be required to meet the full capital requirements, which may increase borrowing costs, particularly for SMEs, real estate projects and other forms of financing for the real economy.
Banking supervision should be more risk-based and take account of the balance between risks and benefits as well as the principle of proportionality. The goal is to avoid unnecessarily restricting banks’ capacity to lend and invest.
A small banks regime is a dedicated regulatory framework for smaller banks. Its purpose is to provide a regulatory approach that is better tailored to their structure and business models, helping to preserve their role in financing SMEs and supporting regional economies.
The Association of German Banks advocates a regulatory approach geared towards competitiveness that enables the financing of investment, innovation and growth while strengthening Europe’s economic sovereignty.
Competitiveness in the banking sector
Michaela Zattler
Head of Banking Supervision and Accounting
Sebastian Moll
Banking Supervision and Accounting