Jaspal Singh
- 12 September 2025
- OCCASIONAL PAPER SERIES - No. 374Details
- Abstract
- This paper explores the interplay between the risk- and leverage-based prudential and the resolution frameworks within the EU banking system. The prudential framework is designed to enhance the resilience of both individual banks and the banking sector as a whole. It does so by imposing minimum capital requirements and capital buffers that can absorb losses during periods of financial stress. Conversely, the resolution framework focuses on ensuring that banks have adequate loss-absorbing and recapitalisation capacity to facilitate an orderly resolution process, thereby safeguarding public funds. The simultaneous use of capital across and within these two frameworks can have an impact on the effectiveness of capital buffers, presenting various challenges for macroprudential authorities. Our analysis shows that overlaps between risk-based and leverage-based requirements within the prudential framework reduce buffer usability to around 65% to 74% of the overall combined buffer requirement. When the resolution framework is also considered, buffer usability further declines to an average of 40% to 50%, depending on the analytical approach employed. Our simulations of buffer usability under different regulatory options discussed in the literature suggest that implementing the final Basel III standards in the EU would significantly increase buffer usability. The paper also analyses the impact of other options that could reduce or eliminate overlaps between capital buffers and other parallel requirements and quantifies the trade-offs between increased buffer usability and the costs of implementation. As resolution requirements are fully phased in as of 2024, the future evolution of buffer usability and the potential challenges for macroprudential authorities will also depend on how banks set their capital targets relative to the parallel frameworks and how they adapt their balance sheet structures to meet prudential and resolution requirements.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
- 15 May 2024
- FINANCIAL STABILITY REVIEW - ARTICLEFinancial Stability Review Issue 1, 2024Details
- Abstract
- The emergence of generative artificial intelligence (AI) tools represents a significant technological leap forward, with the potential to have a substantial impact on the financial system. Conceptually, AI brings both benefits and risks to the financial system. Practically, the overall impact will depend on how the challenges related to data, model development and deployment are addressed – both at the level of financial institutions and for the financial system as a whole. If new AI tools are used widely in the financial system and AI suppliers are concentrated, operational risk (including cyber risk), market concentration and too-big-to-fail externalities may increase. Furthermore, widespread AI adoption may harbour the potential for increased herding behaviour and market correlation. Should concerns arise that cannot be tackled by the current regulatory framework, targeted initiatives may need to be considered.
- JEL Code
- G01 : Financial Economics→General→Financial Crises
G10 : Financial Economics→General Financial Markets→General
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G20 : Financial Economics→Financial Institutions and Services→General
G41 : Financial Economics