Calls for EU financial-rule simplification should not spill over into lower standards

EU banking rules are under pressure for simplification, but reforms should cut complexity without weakening financial safeguards.

Strong financial regulation provides benefits that often outweigh its costs. The financial sector requires close supervision because it channels private savings into the economy in a situation in which financial service providers understand finance much better than those they provide services to. Banks can also be so large (‘systemic’) that they pose a threat to financial stability, as seen nearly 20 years ago during the global financial crisis.

Nevertheless, the financial industry typically argues for less-strict regulation. Some European Union bank supervisors have joined the chorus, including the European Central Bank (ECB, 2025, 2026), Germany’s Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, Bafin) and central bank (Bundesbank, 2025), authorities in Nordic countries¹ and the National Bank of Belgium (NBB, 2026). Mario Draghi in his report on competitiveness for the European Commission said financial regulation had become too complex (Draghi, 2024). The Dutch, German, French, Italian, Polish and Spanish finance ministers in March 2026 also called jointly for a simplification push².

In mid-July, the European Commission is due to publish a report on the competitiveness of the EU banking sector, which may take up these ideas³. To better understand the current debate on bank regulation, it is worth looking at the most interesting elements of three sets of proposals:

1. An ECB report published in December 2025 on possible simplification (ECB, 2025a);
2. Bafin/Bundesbank (2025) on a simpler regime for small and non-complex banks;
3. October 2025 proposals from the European Banking Authority on the efficiency of the regulatory and supervisory framework (EBA, 2025).

These proposals can be measured against a metric of whether they provide for simplification while not lowering regulatory standards. A secondary test is whether they would reduce complexity. The most promising proposal among those we review is a simpler regulatory regime, with safeguards, for smaller and non-complex banks. 

Simplification proposals

The European Central Bank

A report written by an ECB High Level Task Force on Simplification (ECB, 2025a) made numerous recommendations, most of which are not especially new and are unlikely to lower standards or have a substantial impact on simplification⁴. Many recommendations concentrate on regulatory and reporting simplification.

However, three recommendations that touch on capital buffers that banks must hold as a safeguard are potentially concerning.

1. A proposal to reduce the number of capital elements in the prudential framework;
2. A recommendation that adjustments should be made to the design or roles of capital intended to absorb losses while a bank remains a going concern (known as Additional Tier 1 (AT1) capital) and capital to absorb losses once a bank fails (Tier 2);
3. Closer alignment of the EU Minimum Requirement for Own Funds and Eligible Liabilities (MREL) and the international Total Loss-Absorbing Capacity (TLAC) frameworks (standards for bank safety nets in case of financial crisis or bankruptcy), while reviewing how these interact with the going-concern framework. The EU introduced the stricter MREL standard in reforms in the mid-2010s, in advance of the entry into effect of TLAC in 2019.

These changes could lead to banks being required to hold less capital, potentially increasing the risk of bank failures. The capital requirements are admittedly complex. However, if elements are removed, the sum of capital requirements should not be reduced. Lowering capital requirements by removing certain elements would be simplification that lowers standards. Maintaining capital requirements while removing elements would be simplification without reducing standards.

AT1 mostly serves to generate profits for the investment banks that sell the assets that underpin it. AT1 has value for banks because it is uncertain, if a problem arises, whether authorities will impose losses on AT1 or resort to bail-in. This reduces the cost of AT1 to the banks but at a cost to taxpayers. AT1 should be abolished to create greater certainty in resolution. It should be replaced by Common Equity Tier 1 (CET1) – the highest standard of capital. However, that would likely create an industry outcry. 

The changes to align the MREL and TLAC requirements would be in line with some calls to reduce complexity by defaulting to TLAC, improve the efficient use of capital in Europe and reduce reliance on costly third-party markets⁵. This alignment is referred to as TLAC+. It is important that TLAC+ is not defined in a way that reduces capital requirements.  

The Bafin/Bundesbank proposals

Bafin and the Bundesbank in a joint paper (Bafin/Bundesbank, 2025) proposed a special regulatory regime for smaller and non-complex banks⁶. They have in mind the Sparkassen (savings banks) and Genossenschaftsbanken (cooperative banks), which dominate the German financial landscape, together with the two German globally systemic banks, Deutsche Bank and Commerzbank. 

Smaller EU banks with total assets below €10 billion and simple business models, are subject to a disproportionate regulatory burden compared to their systemic risk, according to Bafin/Bundesbank (2025). These banks should be able to opt out of EU requirements⁷ that are based on the Basel standards for large international banks, including increasingly complex capital and liquidity requirements. They should be subject instead to a simpler, more proportional supervisory regime. This would replace risk-based capital standards with a leverage ratio, while streamlining reporting and stress-testing procedures.

A more proportionate regulatory framework for smaller EU banks (in the jargon: Less Significant Institutions, LSIs) can offer advantages. Nevertheless, history shows that multiple LSIs encountering difficulties simultaneously – especially because of comparable underlying factors – may collectively exert a systemic effect on the financial sector. For example, about 25 smaller UK banks failed between 1991 and 1994 because of a crash in the domestic property market (Hindmoor and McConnell, 2014).

Simpler standards for smaller banks should therefore be calibrated conservatively. Replacing risk-based capital requirements with a leverage ratio could otherwise encourage banks to increase their exposures to higher-risk assets.

Accordingly, the leverage ratio should be set above risk-weighted capital requirements and complemented by restrictions on activities such as securitisation and private-equity financing. Supervisors should also have powers to prevent regulatory arbitrage or inappropriate risk-taking, and to require banks to return to the full regulatory regime where necessary.

To preserve a level playing field, the largest small banks could opt into the larger-bank regime. If few do so, standards under the small-bank regime should be tightened.

With these safeguards, there is a strong case for not applying the strictest capital-buffer requirements to smaller banks.

European Banking Authority proposals

The EBA’s recommendations cover, among other things, the production of technical standards and guidelines addressed to financial institutions – the EBA’s core task⁸. In this area, the EBA proposes a new review methodology, a review of the existing rulebook and steps to make it more accessible (see Table 2 in the appendix). 

The production of such technical standards and guidance suffers from at least three problems. First, such standards and guidance are produced when needed for the implementation of EU financial laws via secondary legislation. Issues that cannot be agreed in the top-level lawmaking process are pushed into secondary lawmaking (technical and implementing measures), recourse to which has exploded⁹. Many secondary laws go well beyond their initially more technical aim¹⁰.

Second, secondary acts are drafted by groups of specialists from all national authorities. They all have their own ways of doing things and the result is the sum of all approaches. Third, drafts then move through subcommittees and are finally approved by the EBA Board of Supervisors (BoS), the members of which are briefed by their specialists. Therefore, the BoS is rarely able to take a holistic view and make substantial changes. 

To break this pattern, a change of culture is needed at all stages of the process. In this respect, the EBA has made the right proposals – but they must be delivered on. Peer reviews can strengthen mutual understanding of best practice, but legislative changes have made the process more adversarial between the EBA and the National Competent Authorities that work with the EBA¹¹.

Simplification should not spill over into lower standards

There is some justification for the view that EU financial regulation has become too complex. In this context, the ECB, Bundesbank/Bafin and EBA proposals – primarily on restructuring capital buffers and introducing a lighter-touch regime for smaller banks – deserve closer analysis. Proposals should be assessed according to two criteria: whether they make a difference, and whether they would lower standards.

A more proportionate framework for smaller, non-complex banks would be the most obvious win from a simplification push, provided it is calibrated conservatively and accompanied by robust safeguards against systemic risk and regulatory arbitrage. Other simplification proposals are more questionable. The main danger is that the simplification debate will spill over into lower standards, particularly if a strong bank lobby uses simplification to push for lower capital standards.

Current capital and liquidity standards ensure well-capitalised banks and support long-term investment in Europe (Berg et al, 2025). The global financial crisis cost the euro area about 9 percent of GDP (Chen et al, 2019); that disaster should not be repeated.

Source : Bruegel