(Bloomberg) -- The European Central Bank slightly raised capital requirements for the region’s lenders, saying geopolitical risks had increased even as the industry continues to reap bumper profits.
Overall, banks face a minimum bar of 11.3% for high quality capital next year, up from 11.2% in 2024, the ECB said in a statement on Tuesday in Frankfurt. The watchdog sets one portion of those buffers, which increased after “changes in the risk profile of selected banks.”
European banks have benefited from higher interest rates over the past two and a half years, fueling record earnings and boosting payouts to shareholders. Yet the ECB has warned that lenders face numerous risks, from geopolitical tensions to climate change.
“We’re in a period of heightened uncertainty,” Claudia Buch, who leads the ECB’s bank oversight arm, said in a Bloomberg TV interview. “It’s important that we have a sound and stable banking system.”
The ECB also said that it more than doubled the number of banks that face additional requirements because of “excessive leverage.” Thirteen lenders now have to maintain a leverage ratio — a blunter measure of capital strength — above the 3% minimum. The additional buffers range between 0.1 and 0.4 percentage points.
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Still, Europe’s wider banking industry is “robust” thanks in large part to its capital reserves, Buch said. Related reforms after the financial crisis mean “they’re in a better position to lend to the real economy,” she said in the interview.
Earlier, Buch told reporters that banks plan to return 49% of their profit for 2024 to shareholders via dividends and stock buybacks. While that’s down 1 percentage point from a year earlier, Buch told Bloomberg TV that banks “have sufficient buffers on top of the prudential capital requirements.”
Buybacks have become less attractive to banks that are closing their discounts to book value. With limited demand for credit, some lenders are turning to takeovers to deploy excess capital and chase growth.
“It’s a quite natural response of banks to a changing competitive environment,” Buch said, without mentioning any banks. “The digitalization of financial services is a very important driver here.”
While the ECB examines whether banks have the necessary financial strength and “soundness” for such transactions, it’s for banks and their shareholders to decide on pursuing deals, Buch said.
--With assistance from Levin Stamm, Jonathan Ferro, Lisa Abramowicz and Annmarie Hordern.
(Updates with comments from interview starting in fourth paragraph.)
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