New proposals from the European Central Bank (ECB) that are intended to simplify bank regulation aren’t actually that simple, says Moody’s Ratings.
In a new report, the rating agency said that a set of proposed reforms published by the ECB last week — including measures to streamline regulation and reporting requirements — would reduce banks’ compliance costs in certain areas, but may also raise concerns about the future of the approach to bank capital structures.
In particular, the ECB’s proposals question whether Additional Tier 1 (AT1) and Tier 2 capital instruments would work to sustain a troubled bank. They propose a couple of alternatives — reforming AT1s or eliminating them, and requiring banks to hold Tier 1 capital instead.
“In theory, both alternatives are credit positive for capital quality, but would lead to higher costs for banks,” the report said.
“For that reason, one can expect resistance from banks, and, probably, some [EU governments], especially at a time where U.S. and U.K. authorities have signalled a clear trend toward reduced capital requirements,” it noted.
As a result, it will likely take a long time for reform proposals to actually materialize, Moody’s said — with the ECB’s proposals likely representing the “first step in a regulatory journey that takes years and requires extensive legislative debate to effect concrete changes.”
Additionally, the proposed reforms include recommendations for simplifying the existing capital buffers, streamlining the leverage requirements, widening the ranks of institutions that qualify to use the simpler regime that applies to smaller banks, harmonizing stress testing and reducing duplication in banks’ regulatory reporting obligations.
“Such measures, while technical, could yield tangible cost savings for banks and foster greater harmonization across the EU, supporting comparability among EU banks,” the report said.
Ultimately, Moody’s concludes that while “the ECB’s proposals come amid a global trend toward regulatory relaxation,” its recommendations remain high-level proposals that will likely still have to go through further debate among policymakers, local regulators and industry before they are ready to be adopted.