FRANKFURT - The European Central Bank proposed a simplification ‍of bank capital buffer ‍rules on Thursday, looking to prune some of the complex regulation put in place after the global financial crisis without ​easing the overall regulatory burden. Banks have long complained the supervision has become onerous and others, particularly the United States, are now pushing to cut regulation ⁠and soften capital rules on the premise the supervision constrains bank activity.

But the ECB stuck to its promise that simplification cannot mean lower capital requirements ⁠and Thursday's ‌proposals, still subject to European Commission approval, are focused on fewer rather than lower requirements for the amount of capital lenders must hold to cushion against potential shocks.

"These proposals intend to simplify the framework, while maintaining the resilience of ⁠the European banking system," the ECB said in a statement.

FEWER BUT NOT LOWER CAPITAL REQUIREMENTS

The ECB's number one recommendation is to simplify the design of banks' capital requirements and buffers, called the capital stack, as Reuters reported earlier.

The ECB aims to merge existing layers of buffers into just two: a non-releasable and a releasable buffer which authorities can lower in bad times.

The new releasable ⁠buffer would result from merging the countercyclical capital ​buffer with the systemic risk buffer, which are normally built up during tranquil periods and released during downturns.

However, the non-binding Pillar 2 guidance on capital levels would be kept ‍separate, on top of the releasable buffer.

The ECB also wants to reduce the leverage ratio framework from four elements to two, to include a 3% minimum requirement and ​a single buffer, which could be set to zero for smaller banks, the bank said in a statement.

The ECB also proposed expanding the so-called 'small banks regime' so more lenders would fall under simpler supervision requirements.

CONVERTIBLE BOND REFORM?

The ECB also argued that the loss-absorbing capacity of convertible bonds called Additional Tier 1 (AT1) instruments "has been questioned" because banks rarely use the instrument to actually absorb losses, and the security could be reformed along two possible alternatives. Such instruments made headlines in 2023 when Credit Suisse wiped out 16.5 billion francs worth of such bonds during the state-engineered takeover by its rival UBS. The move was later ruled illegal by a Swiss court, though an appeal is still pending.

In the first alternative, AT1 instruments could be enhanced to further ensure their loss absorption capacity but the role of the instrument itself would not be ⁠modified.

Alternatively, it could be completely removed from the going-concern capital stack but that ‌may not be compliant with Basel rules, may go against the principles of simplification and would lead to changes in the regulatory capital demand, the ECB said.

The ECB also called for a reform of the scope and methodology of EU-wide bank stress tests to make them more useful ‌both for the ⁠bank and from a systemic perspective.

The recommendations, endorsed by the ECB's Governing Council, will now be presented to the European Commission for consideration and ⁠any actual change could still take months if not years.

(Reporting by Balazs Koranyi; Editing by Toby Chopra)