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Strength by design: How sound prudential regulation builds bank resilience & board capacity
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Summary:
- Reframing prudential supervision: from compliance cost to bank competitive advantage
- Bank capital requirements & buffers: turning headroom into strategic capacity
- Basel III rules & output floor: lowering funding costs through comparable capital ratios
- Board governance & risk appetite statement: elevating decision-making via ICAAP & SREP
- The future of European bank governance: balancing simplification and prudential regulation
“Sound prudential regulation is not a tax on ambition - it is the architecture that lets a bank keep lending when others retreat, borrow more cheaply because it is trusted, and decide with clearer eyes. The question every board should ask is “how do we turn the capital we hold into strategic capacity?”” - Cezar Chirilă
Reframing prudential supervision: from compliance cost to bank competitive advantage
For most of the past fifteen years, prudential regulation has been discussed as a cost: capital that cannot be lent, reports that must be filed, models that must be approved. In 2026 that framing is under open debate in Brussels, where the European Commission has asked how much of the framework is truly needed for a competitive banking sector. It is a fair question. But it is worth starting from what the framework has already delivered, because the evidence points the other way: well-regulated banks did not simply survive the last five years - they carried the economy through them.
Consider the record. European banks absorbed a pandemic, an energy shock and the banking turmoil of spring 2023 without a systemic crisis, acting as shock absorbers rather than amplifiers. They have since returned to profitability levels not seen before the financial crisis. In the 2025 EU-wide stress test, 64 banks lost about 370 basis points of core capital under a severe adverse scenario and still ended near 12 percent - comfortably above their requirements. Resilience and profitability, it turns out, are not opposites. Resilience is what made the profitability durable.
For boards, this changes the conversation. The task is to turn the framework into a management system. Three ideas make that concrete.
Bank capital requirements & buffers: turning headroom into strategic capacity
Leveraging the Countercyclical Capital Buffer for Market Expansion
First, capital is capacity, not cost. The buffers that sit above the minimum requirement were designed to be used in a downturn, so that a bank can keep lending when others retreat. A board that knows its distance to the buffer trigger knows how much strategic room it has: to grow into a market that competitors are leaving, to stand behind clients when funding is scarce, to make an acquisition at the right moment rather than the wrong one. Headroom is optionality. The board's job is to decide what the optionality is for.
Basel III rules & output floor: lowering funding costs through comparable capital ratios
Second, trust is the cheapest funding a bank will ever have. The output floor, standardised disclosure and a credible supervisor exist to make one bank's capital ratio comparable with another's. That comparability is not a bureaucratic nicety; it is what allows investors, depositors and counterparties to price a bank on its merits rather than on suspicion. Banks that can show their numbers are clean, their models honest and their governance sound borrow more cheaply, attract more stable deposits and are believed when they say they are fine. In a digital deposit market, that belief is the balance sheet's first line of defense.
Board governance & risk appetite statement: elevating decision-making via ICAAP & SREP
Third, the rules make the board better. Fit-and-proper standards, collective suitability, a board-approved risk appetite, an independent risk function, an ICAAP the board must genuinely challenge, an annual supervisory review that scores governance alongside capital - each of these is a structure for judgement. They force the questions that a busy board might otherwise postpone: What is our real constraint? Which businesses earn their cost of capital on honest risk weights? A board that treats these as its own questions, rather than as the supervisor's, becomes a stronger board.
The future of European bank governance: balancing simplification and prudential regulation
None of this argues against simplification. Overlapping buffers, duplicative reporting and rules that do not fit smaller institutions deserve the review they are now getting. But the core of the framework is not what holds European banks back. It is what holds them up.
Written by Cezar Chirilă
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