Europe could unleash twice the lending power of America's biggest bank by simplifying its capital rules, according to one of the region's most powerful finance lobbies.
In a policy paper to be published on Wednesday, the Association for Financial Markets in Europe argues that policymakers should tackle the complexity of the region's capital framework by dealing with overlapping requirements, rather than pursuing German-led plans to limit the €270 billion ($311 billion) Additional Tier 1 debt market.
AFME says such actions could free up as much as €2.8 trillion ($3.2 trillion) in lending capacity -- more than twice JPMorgan Chase & Co.'s $1.5 trillion loan book at the end of last year.
The European Union, which hopes to boost growth by loosening the reins on banks, has invited submissions on how it can change its rules without threatening the safety and soundness of the financial system.
AFME Chief Executive Officer Adam Farkas said the complexity of the region's capital regime -- which can leave single banks with as many as 86 distinct requirements -- was a key topic for the major banks that make up his membership.
AFME's proposal, which would cut banks' overall Common Equity Tier 1 requirements by 2.26% of risk weighted assets, would ease resolution burdens for smaller banks and curb nations' power to set capital levels.
It argues that the 17.7% Tier 1 capital ratio maintained by EU banks is far greater than requirements in other jurisdictions, and they could reduce capital holdings without jeopardizing financial stability.
Farkas, a former executive director of the European Banking Authority, said this would not "lead to the omission of any risk from the capital framework" and would instead eliminate the double counting of risks.
The lobby group is particularly critical of the capital rules introduced after the financial crisis to tackle "too big to fail." It wants the EU to scrap the Minimum Requirements for Own Funds and Eligible Liabilities framework, which is meant to ensure Europe's smaller lenders could be wound up, and replace it with a system similar to the Total Loss Absorbing Capacity rules governing the world's biggest banks.
AFME says that change alone would reduce capital requirements for mid-sized banks by 1.2% and for smaller banks by 1.5%.
Caroline Liesegang, AFME's head of capital and risk management, said those banks would "absolutely" have the capacity to use their extra resources to support the kind of corporate and SME lending that Europe needs for its growth ambitions. "There's a tried and tested framework with TLAC that works for big banks; let's use the same for smaller," she added.
For global systemically important lenders, AFME said its proposal would cut their requirements by 1.1%, mostly by amending the countercyclical capital buffer to an EU-wide neutral level of 0%. This rate is set nationally at the moment, ranging from 0% in markets including Malta to 2.5% in Norway, which various countries have said ensures particular local risks are captured.
AFME also wants a new central EU-wide forum to police capital requirements across the region, potentially under the auspices of the European Systemic Risk Board or European Banking Authority.