The European Central Bank published an Occasional Paper examining how EU prudential capital requirements and buffers interact with the resolution framework, focusing on how overlaps in “going concern” and “gone concern” stacks can limit banks’ ability to draw down macroprudential buffers in stress. Using a sample of 83 Single Supervisory Mechanism resolution groups (Q2 2024), the paper finds that overlaps between risk-weighted and leverage ratio requirements reduce buffer usability to around 65%–74% of the combined buffer requirement, and that adding Minimum Requirement for Own Funds and Eligible Liabilities (MREL) constraints lowers average usability further to 40%–50% depending on the analytical approach. This implies that around half of the EUR 314 billion combined buffer requirement in the sample was usable at the time of analysis, with roughly one-third of banks at 0% usability and one-third at 100%. The analysis also points to governance and transmission implications where the combined buffer requirement in the resolution stack (CBR-M) is the dominant constraint for 48 resolution groups, potentially shifting when distribution restrictions are assessed and enabling a “liability channel” in which banks respond to tighter CET1-based macroprudential buffers by adjusting MREL-eligible liabilities rather than increasing CET1. The paper simulates regulatory options discussed in the literature, suggesting that implementing the final Basel III standards in the EU (including the output floor) would materially increase buffer usability by making risk-weighted requirements more binding relative to leverage-based requirements. Other options assessed include introducing minimum requirements for (subordinated) eligible liabilities within MREL to free up CET1 currently used to meet resolution requirements, and prohibiting the simultaneous use of buffer CET1 across all stacks to achieve full buffer usability at the cost of higher overall requirements and additional issuance needs for some banks.
European Central Bank 2025-09-12
European Central Bank paper estimates EU banks’ capital buffer usability falls to 40%–50% once resolution requirements are included
The European Central Bank's Occasional Paper examines how EU prudential capital requirements and the resolution framework overlap, limiting banks' buffer usability to 40%-50%. It suggests that final Basel III standards could improve usability by making risk-weighted requirements more binding. The study also considers regulatory options like introducing minimum requirements for eligible liabilities within MREL and prohibiting simultaneous buffer CET1 use across stacks.