January 24, 2018

Dr Andreas Dombret of Deutsche Bundesbank spoke in Cape Town about the the importance of proportionality in regulation at the European as well as the international level. He emphasized that "The success of Basel III depends crucially on whether or not we get the implementation right." He further explains that to get implementation right involves full and consistent implementation with the agreed standards, while accounting for regional differences and local circumstances. To this end, he said that "I am convinced that we need to strengthen the principle of proportionality in banking regulation."

Dr. Dombret highlighted that "... proportionality is necessary to safeguard the original goals and spirit of the Basel framework. The European Union is acknowledging this ... . The latest development is a draft report by the European Parliament, to which amendments could be made up until today and which I expect to be finalized in the near future." He then explained that the "relief measures" are targeted at small institutions, those "with a moderate amount of total assets." However, what qualifies as a "moderate amount" differs in each EU member state. The quantitative threshold should be supplemented by additional criteria that prevent institutions with riskier business models from benefiting from simplified rules. For example, banks that qualify must not use internal models and should have a small trading and a small derivatives book. Although "...there will almost never be a perfect list of criteria that covers every eventuality, the final decision should always rest with the supervisors." Next, he discussed "...the choice between two alternatives for improving proportionality. One is to change the fine print, that is, to introduce simplifications to and exemptions from individual rules. The other is to create a whole new framework tailored to small and low-risk banks. I personally believe the latter approach to be the more appealing ...." Bundesbank has been involved in the development of a concept for such a framework called the "Small Banking Box," said Dr. Dombret.

He said that it remains to be seen whether the Small Banking Box will be the way forward for EU, while highlighting that "the most recent European Parliament report is promising." The focus is on reducing the administrative burden and the paperwork that the complex regulatory requirements create in various areas for small and low-risk institutions. "Among the measures we are looking at are exemptions from disclosure requirements, reductions in the granularity of reporting requirements, and a simplified form of the net stable funding ratio (NSFR). All of this is very close to what the Bundesbank has proposed and supported in the past .... As a rule of thumb, we can say that any rules that are dispensable for effective supervision are up for debate." However, this also means, according to Dr. Dombret, that many rules are not up for debate; for example, there can be no concessions in terms of risk-based capital ratios, the leverage ratio, or the short-term liquidity ratio. He also highlighted that the Basel Committee considers proportionality to be a relevant topic and that the Financial Stability Institute (FSI) has already performed an insightful cross-country comparison on proportionality in banking regulation. Dr. Dombret concluded that he highly values this work and would appreciate to see more such work on proportionality from the FSI or the Basel Committee in the near future.

 

Related Link: Speech

Keywords: International, Europe, Banking, Proportionality, Small Banking Box, Basel III, Bundesbank, BIS

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