ECB Adopts Individualized Approach to Capital Reserves
Since December, the European Central Bank (ECB) has been issuing letters to individual financial institutions across the European Union (EU) outlining specific capital reserve requirements and suggested corporate governance improvements. The letters likely come as a surprise to many firms, which expected to be bound by only the minimum capital ratios outlined by the monetary body. According to reports, each bank has received its own individualized ratio prescribed by the ECB. In many cases, these ratios are well above the regulatory requirement.
Deteriorating economic conditions in EU member states likely motivated the move. Conversely, however, EU markets are expected to suffer in the short term as investors react to the increased burden on the largest financial institutions. Many firms have been quick to criticize the decision for its inequity. The ECB’s actions certainly reflect a growing caution in the EU as member states prepare for potentially worsening conditions.