Regulation
January 13, 2026
In December 2025, the Governing Council of the European Central Bank (ECB) took an important step by endorsing a set of recommendations aimed at simplifying the European Union’s banking regulatory, supervisory, and reporting framework. Developed by a High-Level Task Force on Simplification, these recommendations have been forwarded to the European Commission for further consideration. This article outlines the ECB’s key proposals and explains why they matter for banks, supervisors and the broader EU financial system.
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The objective of this simplification is to move towards a more efficient, proportionate, and harmonized regulatory landscape, preserving the strength and resilience of the financial system while reducing unnecessary complexity for banks of all sizes.
In this context, it is useful to distinguish between regulatory, supervisory, and reporting requirements.
Regulatory rules define the formal obligations banks must comply with, such as capital and leverage requirements. Supervisory practices determine how authorities oversee banks in practice, interpret the rules, and assess risks on an ongoing basis. Reporting requirements relate to the data banks must submit to authorities to demonstrate compliance and support supervision and resolution. While distinct, these three layers are closely interconnected, and complexity in one often amplifies complexity in the others.
Why Simplification Has Become a Policy Priority
Over the past decade, EU banking regulation has expanded significantly. While this has strengthened resilience, it has also led to:
- Multiple overlapping capital requirements and buffers
- Increasingly complex supervisory expectations
- Fragmented application of rules across Member States
- Heavy and duplicative reporting obligations
The ECB’s central message is that regulatory complexity does not automatically increase financial stability. In some cases, it can obscure risks, reduce transparency, and create unnecessary operational costs, particularly for smaller and less complex institutions.
The sections below set out the ECB’s main proposals and assess how they aim to address these challenges.
1. Bank Capital Requirements: Fewer Layers, Clearer Use
One of the ECB’s core areas of focus is the structure of bank capital requirements. Over time, capital buffers have accumulated, each with different usability rules and triggers. As a result, the overall capital “stack” has become increasingly difficult to interpret and manage, both for banks and supervisors.
To address this, the European Central Bank proposes moving towards a simpler buffer structure built around two main elements:
- A non-releasable buffer, permanently in place to ensure baseline resilience
- A releasable buffer, which can be drawn down in periods of stress
This simplification is intended to improve clarity, make capital more usable in downturns, and preserve overall resilience while increasing the effectiveness of the framework.
2. Leverage Ratio: Preserving the Backstop, Reducing Complexity
The leverage ratio plays a key role as a non-risk-based safeguard against excessive balance-sheet expansion. However, the current framework includes multiple components and buffers, adding complexity without a clear prudential benefit.
The ECB recommends streamlining the leverage ratio while retaining its core function. In practice, this would mean:
- Keeping a 3% minimum requirement
- Applying a simpler buffer structure only where justified
The result would be a framework that continues to provide a strong backstop, while reducing unnecessary operational burden and improving proportionality, particularly for smaller institutions.
3. Bank Capital Quality & Capital Demand
The ECB addresses both the quality of going‑concern capital and the need for system‑wide coordination. It proposes two approaches to strengthen capital quality: enhancing AT1 features to ensure credible loss absorption while remaining Basel‑compliant, or removing non‑CET1 instruments from the going‑concern stack to simplify the framework, acknowledging resilience, Basel‑compliance, and capital‑neutrality trade‑offs.
In parallel, the ECB recommends establishing a governance mechanism through the Macroprudential Forum to take a holistic view of overall capital demand across the banking union, coordinating micro and macroprudential requirements to reduce overlaps and improve consistency, buffer usability, and predictability for banks and investors.
4. Proportionality: A Broader and Simpler Regime for Smaller Banks
Proportionality is a central theme of the ECB’s recommendations. Today, smaller and less complex banks are often subject to rules designed for large, systemic institutions, leading to compliance costs that can be disproportionately high.
The ECB therefore calls for an expansion and simplification of the small banks regime, which would include adjustments to:
- Prudential requirements
- Reporting obligations
- Supervisory expectations
The aim is to reduce administrative burden, free up resources for lending to households and firms, and do so without materially increasing systemic risk.
5. Macroprudential Policy: Closing Cross-Border Gaps
Macroprudential tools are essential for addressing system-wide financial risks, but their effectiveness depends on consistent application across borders. At present, measures adopted at the national level may not bind foreign banks operating in the same market.
To address this, one of the key recommendations of the ECB is to introduce automatic reciprocation of macroprudential measures. It means that when a measure is activated in one country, all banks operating there would be required to apply it, regardless of where they are headquartered.
This approach would help prevent regulatory arbitrage, ensure a level playing field and strengthen financial stability across the EU.
6. Bank Resolution: Better Alignment, Same Resilience
Effective bank resolution requires a framework that is both clear and credible.
The ECB recommends improving alignment between resolution requirements for EU banks and those applicable to global systemically important banks. Concretely, the ECB proposes streamlining the MREL framework by introducing a uniform floor calibrated to the TLAC standard, complemented by a bank‑specific component set by the resolution authority. This reduces the number of parallel “stacks” and clarifies multiple distribution‑restriction triggers.
A key principle underpins this recommendation:
- Simplification must not come at the expense of loss-absorbing capacity
- Simplification must also not reduce the credibility of resolution strategies
The objective is a more coherent and consistent framework, not weaker protection.
7. From Directives to Regulations: Less Fragmentation
Differences in national implementation remain a major source of regulatory divergence across the EU. To reduce fragmentation, the ECB recommends relying more, where possible, on directly applicable EU regulations and reducing dependence on directives that require national transposition.
This shift would:
- Support more uniform application of rules across Member States
- Limit legal divergence
- Contribute to a more integrated EU banking market
8. Stress Testing: More Focus, Greater Policy Value
EU stress tests remain an essential tool, but they have become increasingly complex.
Proposed improvements by the ECB:
- Streamline methodologies and reduce unnecessary granularity
- Improve coordination between microprudential supervision and macroprudential oversight
- Focus on results that directly inform capital planning, buffer calibration, and supervisory decisions
- Simplifying quality assurance and reassessing frequency to reduce compliance costs
The objective is stress tests that are actionable and policy-relevant, rather than merely exhaustive.
9. The Broader Context: Integration and Growth
The ECB situates these recommendations within wider EU objectives, including the completion of the Banking Union, progress towards a Savings and Investment Union, and the development of deeper and more efficient capital markets to enable cross-border risk management and efficient allocation of liquidity within banking groups.
Simpler and more harmonized rules are seen as key to supporting cross-border banking and channeling savings into productive investment.
10. Supervisory Framework: Simplifying and Refocusing Oversight
The ECB calls for strengthening and completing the Single Rulebook, reducing reliance on national discretion. This shift would make supervision more consistent and predictable across the banking union, supporting integrated risk management for cross‑border groups.
In parallel, the ECB recommends increasing the risk‑focus of supervision by reducing overly prescriptive requirements on processes and frequencies. Examples include revisiting mandatory timelines for internal model reviews and stress testing, and simplifying approval processes for certain capital changes. The goal is to allow supervisors to allocate resources where risks are most material, while maintaining resilience and accountability.
Together, these changes aim to make European supervision more efficient, proportionate, and aligned with the evolving risk landscape.
11. Reporting and Data: One System, Multiple Uses
Reporting requirements are among the clearest sources of unnecessary regulatory burden. Banks often submit similar data repeatedly, in different formats, to different authorities, with limited use of proportionality.
The ECB recommends:
- Developing a single integrated reporting framework that can be used simultaneously for supervision, resolution, and statistical purposes.
- This should be complemented by the introduction of materiality thresholds, reducing resubmissions linked to minor or immaterial errors.
- Transparency on reporting requirements and mandate periodic reporting with objective criteria, and decommission outdated collections in a coordinated way.
- Make Pillar 3 disclosures a subset of supervisory reporting, ending parallel transmissions and reducing inconsistencies and reviewing level 1 disclosure for smaller banks.
The expected outcome is lower costs for banks, higher data quality, avoid duplicate collections, and more efficient supervision.
Next Steps: How ECB Recommendations May Shape EU Policy
The ECB’s message is straightforward: simplification is not deregulation. Financial resilience must be preserved, but regulation should be clearer, more proportionate, and more consistent across the European Union.
Nevertheless, turning these recommendations into practice will be complex. Provided the proposals gain sufficient support, their implementation will require careful coordination across regulators, supervisors, resolution authorities, and national bodies, as well as alignment between regulatory, supervisory, and reporting frameworks.
The recommendations have been forwarded to the European Commission, where they may inform future legislative proposals, including the Commission’s broader review of the EU banking system. In parallel, ECB Banking Supervision continues to streamline supervisory practices within the existing legal framework.
In summary, the ECB’s intentions are well placed. A simpler, more standardized, and more understandable framework can strengthen the European Banking Union, support credit and economic growth, and ensure effective supervision of a strategic sector for the European economy. At the same time, it remains essential to recognize both the potential and the complexity of this initiative; this potential goes hand in hand with significant implementation challenges.
To go deeper into the proposals for simplification, you can find the report, Simplification of the European prudential regulatory, supervisory and reporting framework, here, which was published on 11 December 2025 and outlines the proposals for simplification.
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