The European Central Bank urged policymakers on Monday to resist any move to lessen capital requirements for banks operating in the euro area. Claudia Buch, who heads the ECB's Supervisory Board, told euro-area finance ministers that dialing down capital rules would put the resilience of the banking sector at risk and would not guarantee a rise in credit to households and businesses.
Buch argued that weakening capital standards would diminish banks' capacity to sustain lending when the sector faces stress. She warned that a relaxation of requirements may simply free up resources that banks could channel into shareholder payouts rather than expanding lending activity.
Banks across the European Union have been lobbying politicians to soften a planned tightening of regulatory rules that determine how much capital institutions must hold against potential losses. The industry contends that the forthcoming framework will constrain their ability to finance priorities such as defense, technology and climate adaptation.
The sector has already been deploying excess capital to raise dividends and repurchase shares. Buch noted that, while banks currently hold sufficient capital to underwrite lending, several other factors are holding back the expansion of credit supply.
Specifically, she identified elevated risks, banks' lower risk tolerance and weak demand for loans as the main reasons credit is not growing more quickly. In that context, Buch cautioned that reducing capital buffers could simply result in larger distributions to shareholders instead of more lending to firms and households.
Context and implications
The warning from the ECB's supervisory chief centers on the trade-off between bank capital rules and financial stability. Buch's remarks to finance ministers emphasize that regulatory settings intended to strengthen banks exist to preserve the flow of credit through periods of stress, and that loosening those settings does not come with a guarantee of increased lending.
Policymakers considering changes will need to weigh industry concerns about impeded lending against the supervisor's view that sufficient capital is already in place and that other forces are dampening credit growth.