Andreas Dombret of Bundesbank Speaks on Regulatory Proportionality

He examined the chronology of actions taken and the ways explored toward embedding the principle of proportionality more deeply within the regulatory and supervisory frameworks. He also discussed the EC proposals for strengthening proportionality as part of the general overhaul of EU banking regulation, which is still an ongoing process. “These proposals would make major changes to the small print, and I am certain that we will be able to roll out a number of meaningful initial improvements. That said, the proposals don't go far enough—which is why we thought ahead.” To this end, he highlighted that a German discussion paper was put before the competent expert group of the EC in June this year. The paper proposes two paths toward greater proportionality and discusses the pros and cons of each: one path involves adjusting the existing regulatory framework and the second path involves creating a dedicated regulatory framework for small institutions (small banking box).

According to Dr. Dombret, the German proposal adopts a three-tiered approach to greater proportionality. In this proposal, systematically important institutions with the potential to pose systemic risk will be subject to Basel III in full while medium-sized institutions will be provided with selective relief. A stand-alone supervisory regime, known as small banking box, has been proposed for the small, less complex institutions. The paper then proposes a classification criteria for categorizing the institutions into these three tiers. It proposes no proportionality for risk-based capital ratios, leverage ratio, and liquidity coverage ratio, emphasizing “that a lot of rules are not up for debate” and “that the very purpose of our joint proposal is to avoid unnecessarily high amounts of paperwork.” It is to be noted that this debate is now at the European level and the government, supervisors, and German banking industry unanimously hold a joint position. He concludes that “we must present a united German front. If we in Germany do not manage to all stand behind the small banking box concept, we will have a hard job convincing other European countries.”

Related Link: Speech

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