This report does not constitute a rating action. European banks have substantial capital buffers relative to their regulatory requirements. This follows years of banks ramping up capitalization--on both a regulatory basis and based on our measurement of risk-adjusted capital (RAC)--since the global financial crisis and European sovereign debt crisis. Stronger profitability and typical low growth in risk exposures are providing an annual surplus of post-tax earnings, allowing management to make strategic choices. They can decide whether to maintain or reduce those buffers and whether to pay out the free capital to shareholders, pursue mergers and acquisitions (M&A), or both. This is likely to result in more divergence in capital trends across the region. Capitalization (measured on our RAC basis) remains
