Improving the financing of the European economy: proposals of the FBF

The current regulatory framework in Europe reduces the ability of European banks to finance the economy by unnecessarily freezing resources. To respect the dual imperative of financial stability and financing of European players, here are the proposals for simplification and revision of its regulatory framework.

Context analysis

The European regulatory framework drawn up after the great financial crisis of 2008, oriented towards financial stability, imposes structural constraints that penalise the competitiveness of European banks and limit the financing capacities of European players:

• Higher capital requirements: European banks have unprecedented CET1 ratios (~16% vs. 12–13%)[1], which, coupled with an overly complex regulatory framework, limits their lending capacity and weighs on their profitability.
• Excessive MREL requirements (average level of 28% of RWA in Europe versus 22% for US banks, where the TLAC also only applies to GSIBs).
• Rigid risk calculation methods (less flexibility in the use of internal models, which reduces balance sheet management) and additional requirements set by the supervisor.[2]
• Regulatory proliferation by European authorities (EBA, ECB, AMLA…) without coordination or holistic vision.

Our proposals

To meet this dual objective of financial stability and financing for European stakeholders, the FBF puts forward proposals structured around three main priorities:

1. Improving the financing capacity of the European economy
   • Make permanent the transitional provisions for calculating the output floor (residential real estate, unrated companies, counterparty risks, etc.) and freeze the output floor at its current level.
   • Review the prudential treatment of software (IT, IA investments) to ensure EU sovereignty.
   • Review prudential requirements for real estate financing, including independent property valuation requirements.
   • Review the requirements for trade finance operations and project, infrastructure and specialized finance operations.
   • Remove obstacles to the cross-border movement of capital and liquidity in the European Union by finalising the Banking Union.
   
   
2. Ensuring a level playing field without threatening financial stability
   • Align the timing and content of market risks with the other main jurisdictions, to ensure a level playing field with a “quick fix” proposal in 2026 as a matter of urgency to obtain a new deadline to align with the upcoming US text ; simplify the requirements related to the trading/banking border, especially for institutions that do not have a trading book under CRR2.
   • Review the regulatory assumptions for calculating structural interest rate risk that unduly penalise the balance sheet structure of banks lending at a fixed rate.
   
   
3. Eliminate Goldplating and Unnecessary Complexities
   • Simplify the macro-prudential framework which creates a pile of buffers managed without overall coherence and reaches a very excessive degree of complexity.
   • Align the European Union’s MREL requirements with international TLAC requirements to improve the efficient use of capital in Europe and reduce reliance on costly third-party markets.
   • Review the prudential valuation framework for Prudent Valuation, which does not exist in the Basel framework and which freezes large amounts of capital.
   • Discard the NPL backstop, which does not exist in the Basel framework and which biases the management of outstanding loans in default.

[1] ACPR – situation of the major French banking groups at the end of 2024

[2] According to a GARP study conducted by the FBE, for the 15 participating banks, the minimum required level of 4.5% CET1 capital for 2024 was €243.8 billion. The Basel buffers increase the required CET1 capital by 66% to €405.7 billion. Discretionary adjustments by supervisors further increase the required CET1 capital by 67% above the revised baseline, to €678.9 billion, which could impact lending by €2.7 trillion to €4.1 trillion.