ECB Sees Bank Capital Demands Remaining Steady Beyond 2018

Updated on
  • Capital trigger for payout restrictions rises as foreseen
  • Nonperforming loans, Brexit, business models remain priorities

The European Central Bank said its capital demands on the lenders it supervises are unchanged on average for 2018, and will likely remain at that level for longer.

The overall demand for common equity Tier 1, the highest quality regulatory capital, will be 10.1 percent of risk-weighted assets next year, according to a report published by the ECB on Monday. “All other things being equal,” the current capital demand in the euro-area banking system “can be expected to remain broadly stable” and “provides an indication for the future,” the Frankfurt-based central bank said.

While the ECB’s overall expectation holds steady, banks will have to meet higher requirements to pay out bonuses, dividends and additional Tier 1 debt coupons in 2018. The change results from an increase in the level of two capital buffers, according to the ECB.

Under European Union rules, once a bank’s losses pierce the capital level comprising statutory and lender-specific requirements and its combined buffers, it must prevent money from leaving the business. The distribution of profits is capped by the so-called maximum distributable amount.

MDA Trigger

The trigger for calculating the MDA fell last year to an average of 8.3 percent CET1 when the ECB replaced a portion of binding requirements with non-binding guidance, which isn’t factored into the determination. In 2018, this trigger rises to 9 percent, driven by higher systemic-risk buffers and a scheduled increase of the capital conservation buffer.

Only one bank was below the MDA trigger level -- a value that’s different for every lender -- at the end of June, the ECB said, without identifying the firm. At the same time last year, five banks were below the required level.

The ECB’s priorities for next year are scrutiny of banks’ business models, nonperforming loans and internal risk models, it said. On Brexit, the ECB said it will continue working to prevent the creation of “empty shell institutions” as firms relocate activities from the U.K. to the euro area.

The ECB came under fire from policy makers in Brussels and Italy after proposing new guidelines for how banks should provision for nonperforming exposures. It stressed again on Monday that stocks of soured loans “remain large at a number of institutions and this ultimately may have a negative impact on bank lending to the economy.”

    Before it's here, it's on the Bloomberg Terminal.