Heterogeneity in buffers set for systemically important banks in the European banking union

Unwarranted heterogeneity in O-SII buffer levels across the European banking union may have adverse consequences for financial stability and the level playing field in the banking market. Analysis of national buffer-setting yields evidence of heterogeneity which does not result from differences in the size, concentration and funding structure of the domestic banking systems. From a banking union perspective, buffer-setting by national authorities results in heterogeneity at both the upper and the lower end of the distribution of a bank’s systemic relevance. The recent enhancement of the ECB’s O-SII floor methodology is designed to mitigate unwarranted O-SII buffer heterogeneity at the lower end of the buffer range. As the ECB can impose higher macroprudential requirements but not reduce macroprudential requirements, it is not possible for its methodology to address instances of unwarranted heterogeneity at the upper end. JEL Classification: G21, G28