The concept of proportionality, embedded in all legal systems, aims at keeping the level of public intervention – in the form of rules, restrictions or sanctions – appropriate to what is actually needed to achieve the desired social objectives. In banking regulation, proportionality ensures that rules are applied in a manner that is appropriate, taking into account, in particular, the bank’s size and internal organization and the nature, scope and complexity of its activities.
Simple and “easy to apply rules” are necessary for small and medium-sized banks, while more sophisticated banks may prefer to develop their own systems, tailor-made for the risks of their business and their groups. At the same time a level playing field for the industry needs to be maintained.
In our views, the discussion on proportionality should be guided by the following principles:
- Proportionality contributes to the diversity and hence to the resilience of the banking sector
- The drivers for proportionality are not only the size of banks, but also their business models, complexity and systemic relevance
- Proportionality should be embedded in the single rulebook and should focus primarily on rules rather than solely on reporting
- Banks with a simple and limited activity (e.g. in derivatives) should be able to implement simplified approaches in order to avoid undue complexity
- Complex approaches are costly to implement, and they have no added value when it comes to measure the risk incurred by simple activities
- Undue complexity is a source of risk for both banks and regulators
- Proportionality is also a matter of calibration of prudential requirements: the existence of resilient business models should not be put at risk by excessively high requirements or by requirements which are not relevant for some business models.
Initiative of European banking associations
The ABBL and 8 other European banking associations (Austria, Croatia, Denmark, Germany, Italy, Poland, Slovakia and Slovenia) have launched an initiative to promote the debate on proportionality in banking regulation. The associations believe that for small and medium-sized banks, in particular, the high degree of financial regulation is extremely onerous and disproportionately costly.
The EU package of prudential banking rules recently adopted (the new CRR2 / CRD5 to be published soon at the Official Journal of the EU) has introduced some concrete measures to alleviate the regulatory burden on small and non-complex banks, e.g. reduced Pillar 3 disclosure and access to a simplified Net Stable Funding Ratio. The CRR2 defines small and non-complex banks as those having total consolidated assets smaller that EUR 5 billion and fulfilling a range of qualitative criteria (small trading book business, no use of internal models, etc.). Despite this encouraging outcome further action is needed, among other things, to the reporting regime and remuneration requirements.
The aim is not to undo sensible regulation: the same capital and liquidity requirements should continue to apply for the same risks. But a number of measures neither make good sense given the size of the banks involved, nor do they contribute to financial stability. Costs are clearly out of all proportion to the associated benefits.
As an example, reporting requirements generate a vast number of pages and figures, which cause banks a massive amount of time and effort that is totally disproportionate to the gain in financial stability. The 9 banking associations therefore strongly support the completion of the EBA mandate to make recommendations on how to reduce reporting requirements.
The joint position paper of the 9 banking associations is available under the following link.
By Gilles Pierre, Head of Banking Regulation, ABBL