Unpacking the stack: how layered capital requirements shape European banking capacity

The EU’s banking capital framework comprises multiple layers – microprudential requirements, macroprudential buffers and resolution capacity – each calibrated by different authorities that are pursuing distinct objectives. While individually coherent, these layers generate overlaps that constrain banks’ balance-sheet capacity beyond what any single policymaker intended. Common Equity Tier 1 simultaneously has multiple purposes, the same risks are capitalised more than once and fragmented governance prevents the systematic assessment of cumulative effects.

This CEPS Explainer dives into why all this matters for Europe’s strategic priorities, including financing the green transition, infrastructure and defence capabilities, all of which require banking capacity that the current stack currently constrains. Improving regulatory efficiency, through better coordination, enhanced buffer usability and targeted simplification, would strengthen both Europe’s resilience and its investment capacity.

Judith Arnal is Senior Research Fellow at ECRI and CEPS.