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October 14, 2017

Sabine Lautenschläger, Member of Executive Board and Vice-Chair of Supervisory Board of the ECB spoke at an IMF seminar in Washington D.C. She examined the issue of proportionality in supervision and regulation of banks. As small banks are generally less risky than larger ones, "a proportionate approach to regulating and supervising small banks is indeed appropriate." She highlighted that "The call for greater proportionality in banking regulation and supervision is growing louder—not just in the United States and Europe, but also globally."

Ms. Lautenschläger mentioned that "there is a strong case for proportionality. Looking at the European situation, the EU’s single rulebook already provides for such proportionality in many cases."  For example, small banks need to report about 600 data points to supervisors while larger banks must report more than 40,000 data points. Meanwhile, she examined "whether more proportionality in banking regulation is needed." She also outlined the focus areas that are under discussion in Europe to reduce compliance costs for smaller banks and enable banks to apply simpler rules: 

  • One proposal focuses on the capital requirement rules for market and counterparty credit risk. Banks with small trading books below EUR 50 million could be exempted from the obligation to have a prudential trading book, thus enabling them to use the simpler credit risk framework.
  • Banks with trading books below EUR 300 million could use a simpler standardized approach to calculate market risk.
  • In the field of counterparty credit risk, banks with small derivative portfolios might be able to use a simpler standardized approach to calculate capital requirements.
  • Another proposal looks at reducing the regulatory burden of small banks by softening reporting requirements; for instance, a proposal involves reducing the number of data points to be reported by using simplified templates and less granular data.
  • Proposals that involve less frequent reporting are less convincing, as it would mean that supervisors would have to work with outdated information. Also, this would not result in cost savings, as banks would still have to invest in setting up reporting structures. 
  • The suggestions to reduce the disclosure obligations for small banks, particularly non-listed ones, would significantly reduce the administrative burden for these banks.
  • Proposals to exempt smaller banks from some remuneration rules is "something that is worth discussing."

"Proportionality means simpler rules for smaller banks," opines Ms. Lautenschläger. However, it does not mean that the rules should be less stringent, or that banks can hold less capital or liquidity. A crucial issue, according to her, is where to draw the line between small and large banks. Both quantitative and qualitative criteria need to be assessed when considering where to draw the line between small and large banks. In conclusion, she reiterates that the approach to proportionality "should not result in small banks holding far less capital, as they also need to remain resilient during an economic downturn in order to continuously provide credit to the economy."


Related Link: Speech

Keywords: Europe, EU, Banking, Proportionality, Financial Stability, Single Rulebook, ECB

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