EU Banking Reform Plan Upgraded: Capital and Compensation Rules Set to Be Relaxed
0xBroomberg
The European Commission has upgraded its banking-regulation overhaul, loosening capital requirements, leverage rules, and pay caps in a single sweep. The formal announcement drops this Friday; a full legislative package is expected no earlier than Q1 2027.
The "output floor" went from "assess" to "concrete proposal" — what changed?
The output floor — a Basel III mechanism that stops banks from using internal models to push capital requirements too low — is the centrepiece of this upgrade.
The mid-June first draft promised only to "assess the impact of the output floor." The latest draft commits to a "concrete proposal." This means → the Commission has moved from "should we touch it?" to "how do we touch it?"
In plain terms = Europe's largest banks have long used in-house models to calculate lower capital needs; this floor is the check on that practice. If the floor is loosened, banks free up capital for lending or buybacks.
Why strip Pillar 2 out of the leverage ratio?
Pillar 2 capital requirements are set bank-by-bank by supervisors and were previously included in the leverage-ratio denominator.
The latest draft proposes removing Pillar 2 from the leverage-ratio calculation. The first draft only promised better transparency.
This means → the biggest European banks — those most constrained by leverage limits — will see direct relief on their effective capital burden.
Will the EU scrap its bonus cap, as the UK already did?
EU rules currently cap bonuses for "material risk takers" at twice their base salary.
The UK abolished this cap in 2023. Large banks have lobbied the EU to follow. The latest draft adds a new commitment: it will "assess and adjust" the pay restriction.
In plain terms = "assess and adjust" is not "abolish" — but it is a clear signal of direction. The question has shifted from "should we discuss this?" to "how do we change it?"
How is the supervisory architecture being reshaped — and why is the ECB left out?
The draft proposes giving the European Banking Authority (EBA) a competitiveness mandate, but explicitly excludes the European Central Bank from that remit.
This reflects the ECB's strong resistance to any arrangement that could let competitiveness goals interfere with monetary and prudential oversight.
For comparison: the UK gave both of its main regulators a secondary competitiveness objective in 2023. The EU move partly mirrors that precedent.
If rules are being loosened, where is the safety net?
The draft adds a financial-stability caveat: any capital adjustment "needs to be carefully calibrated on the basis of a comprehensive assessment of its overall impact."
It also introduces measures to encourage sovereign-bond portfolio diversification, addressing concentration risk.
This means → the easing is not a one-way door. The Commission is building in a safety valve even as it lightens the load on banks.
What external pressure is driving this — and what comes next?
The UK announced a series of capital cuts last week; the US is also moving to relax parts of its bank-capital framework. The EU upgrade is, in part, a direct response to this transatlantic competitive pressure.
The formal announcement comes this Friday. The full legislative package is expected no earlier than Q1 2027.
The two variables the market will track next: whether the legislation lands on schedule, and how far the output floor is actually adjusted.
Content is for reference only, not financial advice.