ECB reduces capital requirements for banks after stress test results 

The European Central Bank (ECB) has lowered capital requirements for banks after strong performance in recent stress tests, enhancing their ability to make shareholder payouts. 

The move sees the minimum common equity Tier 1 (CET1) capital ratio fall to 11.2% of risk-weighted assets in 2026, down from 11.3% in 2025. 

According to the ECB, the banking sector continues to maintain a substantial buffer above these regulatory minimums, with a weighted average CET1 ratio of 16.1%. 

With this position, European banks can increase dividends and share buybacks, supported by profits and the end of negative interest rates, reported Bloomberg. 

The ECB noted that, while risks remain from trade disruptions and geopolitical conflicts, the industry showed resilience in a stress test published in August.  

ECB stated: “European banks continue to operate in a challenging environment characterised by heightened geopolitical risks as well as changing patterns of competition due to digitalisation and the increased provision of financial services through non-banks. 

“This requires forward-looking risks assessments and sufficient resilience.  

“This is reflected in ECB Banking Supervision’s medium-term strategy for the years 2026-28, which is broadly in line with current priorities. The first priority requires banks to remain resilient to geopolitical risks and macro-financial uncertainties.” 

Reflecting these results, the ECB has reduced the non-binding Pillar 2 Guidance (P2G) buffer to 1.1% of risk-weighted assets for 2026, down from 1.3% this year. 

ECB stated that this reduction will be partially offset by increases in counter-cyclical capital buffer (CCyB) requirements set by other authorities. 

The central bank removed capital add-ons for some banks that have addressed deficiencies in managing risks related to leveraged finance. 

The number of lenders subject to these add-ons has decreased from nine in last year to six this year, according to the ECB. 

Furthermore, the ECB introduced a non-binding P2G for the leverage ratio for five banks and implemented quantitative liquidity requirements for four banks.

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