European Central Bank (ECB) will ease demands for implementation of capital requirements to private banks to compensate for the gradual introduction of capital buffers. ECB will withdraw its demands for capital with the same rate as introducing new buffer, during the next 4 years. The sum of the capital requirements imposed by ECB over individual banks and safety capital buffer will remain at current level. The European banks have already increased the proportion of common equity at Tier 1, which is the highest quality protection against losses, up to 13% from 9% in 2010, which allows the authorities to ease the capital demands.
European Central Bank monitor the banks under the Supervisory Review and Evaluation Process (SREP), using rating system for business models, management, liquidity risk management and financing and capital. With all these measurements, ECB calculates the additional amount is added to the minimum requirements that apply to all banks. The requirement is also known as Pillar 2, while the basic minimum is called Pillar 1. Both criteria must be met to achieve the ratio of common equity at Tier 1 (SET1).
Over Pillar 1 and Pillar 2 stay three types of capital buffers. The safety capital buffer applies to all banks, while systemic risk buffers depend on the size and location of the vault and counter-cyclical capital buffer is determined by national regulators. The violation of the buffers is resulting in restrictions on the ability for banks to pay dividends, bonuses, coupons or contingent convertible bonds, so called Contingent convertible bonds (CoCos).
ECB intends to lower the requirement under Pillar 2, as the precautionary capital buffer grows, allowing the sum of both to remain broadly stable. It is envisaged that the safety capital buffer will grow to 2.5% of risk-weighted assets of the banks until 2019, when it will begin to operate effectively.