The ECB is moving away from a capital-centric approach in its supervisory review process for banks. The new objective involves a shift towards recommendations. In September 2022, the ECB committed to reforming its Supervisory Review and Evaluation Process (SREP), which assesses banks' risks and allocates capital requirements and tasks accordingly. An expert group, composed of five high-profile current and former central bankers, supervisors, and regulators, was tasked with this reform. The ECB enthusiastically welcomed the group's April report on streamlining the process.

Since then, ECB's chief bank supervisor Andrea Enria consistently endorsed the expert group's central message, criticizing SREP as too focused on capital. Instead, he advocates placing more emphasis on qualitative measures, which involve clear instructions from the oversight on how and by when banks must address specific deficiencies.

However, the current SREP process does not yet reflect these changes yet. Capital ratios, indicating the percentage of risk-weighted assets (RWA) that banks must hold in capital, have increased slightly. The total requirements and recommendations to be met in the form of common equity tier 1 capital will rise by an average of 0.4 percentage points to 11.1% next year.

While only a small portion, namely 0.1 percentage points, is attributed to the ECB, higher risk profiles of banks or capital increases due to non-performing loans are playing a minor role, as is emphasized by the ECB. The predominant factor is the introduction or augmentation of countercyclical capital buffers by some Eurozone countries. Nevertheless, the trend is evident as quotas experience a slight rise. The current figure is 10.7% for this year, compared to 10.4% in 2022 and 10.2% in 2021.

Capital ratios are necessary, and the purpose of fortifying against risks with capital buffers is indisputable. However, it makes sense to increasingly focus on clearly formulated tasks with timestamps that banks need to address, rather than habitually raising quotas. It's a call for quality over quantity.

The metrics of Credit Suisse, such as liquidity and capital buffers, seemed impressive shortly before its downfall. But in the end they couldn't withstand the final loss of trust exacerbated by years of accumulated governance problems.