Andreas Dombret of Bundesbank on Proportionality in Banking Regulation

Dr. Dombret discussed the need for greater proportionality in the context of Basel III reforms, which have made regulatory implementation of increasingly complex rules harder for smaller and medium-size institutions. He outlined three principles that need to govern treatment of this issue: financial stability must remain the primary concern, all relief measures must conform to the principle of equal treatment, and treatment should target the day-to-day burden for institutions with low-risk business models (easing of solvency or liquidity rules is out of the question). Within this outlined framework, new treatments are providing considerable scope for banking regulation that is more proportionate for, and thus more reconcilable with, smaller and less complex institutions. He discussed the work of EC and European Parliament in this area, also mentioning that the proposals for eased requirements in the areas of disclosure and reporting are "highly extensive" and a "very welcome development." He also added that he regrets that a general approach—such as the small banking box—was rejected. 

He outlined two potential ways of improving proportionality either by taking a small-scale approach and introducing simplifications and exceptions for individual rules or by creating a whole new framework tailored to small banks and low-risk institutions. The second solution would be further-reaching and clear cut. However, the majority in Europe seems to "favor the small-scale solution." The emphasis must be on "reducing the administrative workload and minimizing the red tape," said Dr. Dombret. To this end, the measures being reviewed include exceptions to disclosure requirements, reductions in the granularity of reporting requirements, and a simplified form of the net stable funding ratio. However, he emphasized the importance of fully implementing the recently finalized Basel III package in the EU and added that, "no concessions can be made, in particular, when it comes to the risk-weighted capital ratio, the leverage ratio, or the short-term liquidity coverage ratio." However, full implementation of Basel III rules does not mean that all banks need to be affected by these highly complex rules to the same extent. Member countries of the Basel Committee are free to apply other rules to smaller banks that are only active in their own home markets and do not pose a threat to international financial stability. This is the framework that should be largely used when revising the EU rules.

In terms of the review of the trading book, Bundesbank favors retaining the simple, standardized approaches currently in place for small institutions with small trading books. Dr. Dombret states that the new, complex standardized approach is good for institutions that engage in substantial trading activity but it is not suited to locally based savings banks or people's banks. He added that Bundesbank supports the idea of EC and the European Parliament to exclude development banks from the scope of the CRD/CRR regulatory framework. "Given, above all, the particularities of the business models of German development banks and their public mandate, I fail to see why these institutions should be subject to complex international regulation.... We are also calling for institutions with total assets in excess of USD 30 billion to be covered by an exemption." He concludes that when implementing the Basel III reforms in the EU, the rules must be applied in full to internationally active banks. However, in case of smaller banks that are not internationally active, the focus should be on reducing the operational burden by scaling back or removing inappropriately complex rules on checking whether it would be possible to exempt entire groups of institutions such as development banks from the European regulation. It is now up to the European Parliament, the EU Council of Ministers, and EC to pave the way for substantial improvements.

Related Link: Speech

Keywords: Europe, EU, Banking, Proportionality, Basel III, Financial Stability, Bundesbank, BCBS