European banks may be sitting on untapped financial resources, and one of the continent's most influential financial groups is urging regulators to unlock this potential. In a policy document scheduled for release on Wednesday, the Association for Financial Markets in Europe argues that simplifying capital rules—rather than restricting the €270 billion additional tier 1 capital market—could significantly expand lending capacity across the continent. The association notes that the current system is burdened by overlapping regulations, with a single bank potentially subject to as many as 86 different rules. By reducing this complexity, AFME estimates Europe could unlock up to €2.8 trillion in lending capacity, a figure more than double the approximately $1.5 trillion loan book reported by JPMorgan Chase & Co. at the end of last year.
The proposal comes as the European Union seeks ways to support economic growth without undermining the stability of its financial system. AFME suggests that reducing the common equity tier 1 capital requirement as a percentage of risk-weighted assets by 2.26 percentage points could ease pressure on bank balance sheets while maintaining their resilience. The association argues that EU banks currently operate with a tier 1 capital ratio of about 17.7%, a level higher than in other jurisdictions, and that part of this buffer reflects duplicated risk calculations rather than additional safety.
AFME also criticizes the post-financial crisis framework designed to address "too big to fail" risks, recommending that the minimum requirement for own funds and eligible liabilities be replaced with a structure more aligned with the total loss-absorbing capacity standards used by global large banks. According to the association, this change could reduce capital requirements for medium-sized banks by 1.2% and for small banks by 1.5%, potentially freeing up capacity for corporate and small-to-medium enterprise lending. The proposal also includes creating a centralized EU forum to oversee capital rules and setting the countercyclical capital buffer at a neutral 0% across the EU, measures that could simplify supervision and reshape capital allocation throughout the European banking system.
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