Capital Constraints by Supervision in Europe

Abstract

This chapter aims at analysing the capital requirements designated by supervisory authorities for individual banks. It aims at providing an overview of additional capital requirements demanded by the supervision unit of the European Central Bank in accordance with the appraisal or asset quality review of the economic situation of individual banks. Additional capital requirements can be imposed by an asset quality review or by a stress test indicating bank situations in a crisis or near crisis. This additional constraint considers a number of situations in which the supervisory authorities establish the need for additional capital. It should be underlined that extreme discretion is exercised in relation to decisions concerning additional capital by supervision, which may be required in addition to capital by regulation that is calculated in accordance with Basel III and the forthcoming Basel IV. However, this points to an issue of overlapping rules and uncertainties in the regulatory and supervisory criteria used for calculating and creating the required level of capital for individual banks.