Ignazio Angeloni of ECB on Proportionality in Banking Supervision
Ignazio Angeloni, Member of the ECB Supervisory Board, suggested taking another look at proportionality in banking supervision, at the Thirteenth Asia-Pacific High Level Meeting on Banking Supervision in Singapore. During his speech, he examined how proportionality principle is translated into legal and regulatory framework; what does European Banking Supervision do to conform to that principle; and what are the challenges one faces and the limits one must respect in applying proportionality in supervision.
He outlined the work and guidelines in this area, both at the international (by BCBS and BIS) and the EU level (via Capital Requirements Regulation and Directive—CRR and CRD IV). He also discussed the areas of Single Supervisory mechanism (SSM) where proportionality applies. These areas relate to significant banks, for whom reporting requirements and fees already differ; less significant banks, for whom the scope and frequency of information requests for reporting requirements depends on the nature of the entity concerned; and the less significant banks that are prioritized into High, Medium, and Low priority entities. Next, he mentioned some initiatives under discussion at the international and European levels to enhance proportionality in banking supervision. Within BCBS, simpler approaches for calculating capital requirements (for example, credit risk, operational risk, credit valuation adjustment risk) have been developed. At the EU level, in the ongoing review of the CRR and CRD IV, EC has proposed simplified market and counterparty credit risk measures for smaller institutions as well as reductions in the frequency and scope of supervisory data reporting and disclosure.
Mr. Angeloni stated: "ECB does not support lowering the reporting frequency for such entities. Frequent reporting is a key source of information for supervisors, especially in relation to smaller institutions, which do not undergo sufficient market scrutiny. Early warning systems are effective only if data are sufficiently frequent. Another challenge stems from setting the thresholds to categorize institutions, because quantitative thresholds are difficult to apply and at the margin may create cliff effects and distortions." He then discussed the challenges and limits of proportionality in banking supervision. Although smaller banks transmit little or no risk to the system, this does not imply that they are individually less risky. He added that, in both US and EU, the number of bank failures has been much higher in less significant than in significant banks, both in absolute terms and in relative terms. Thus, he argued that prudential soundness must remain the overarching principle, regardless of size. Additionally, small banks promote diversification in the banking system; hence, reducing concentration and correlation, if they act independently from each other. However, especially in Europe small institutions are often part of larger groups or associations (such as institutional protection schemes), which reduces the benefit from diversification. The tendency to aggregate in groups or protection schemes clearly confirms the existence of powerful economies of scale and scope.
Finally, he discussed the potential social role of small banks. Small and cooperative banks are still widely recognized as having a social role by granting access to finance, or the provision of other social benefits, particularly in certain areas and for specific population groups. In Europe especially, savings and cooperative banks maintain a strong historical and cultural rooting. However, most of the cooperative sector has moved away from its original social and charitable function and, today, performs standard banking business, providing services indistinguishable from those of its competitors. There may be cases justifying a support to smaller banks that provide financial services where other banks are less present, but there seems to be no compelling reason why such support should be embedded in the prudential framework, added Mr. Angeloni. He concluded that proportionality should not lead to supervisory laxity or deviations from the single rule book. "Arguments and evidence do not support, on balance, a more favorable treatment to small banks by the micro-prudential regulator or supervisor. If deemed justified, for example for social reasons, such support should be provided otherwise. In SSM, prudential soundness, harmonization, and competitive level-playing field have been and should remain the overarching guiding principles," according to Mr. Angeloni.
Related Link: Speech
Keywords: Europe, EU, Banking, Banking Supervision, Proportionality, SSM, Basel III, ECB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
HKMA Publishes FAQs on IRRBB Framework in April 2019Related Articles
OSFI Issues Phase2 Consultation on Climate Scenario Exercise for Banks
The Office of the Superintendent of Financial Institutions (OSFI) recently announced a consultation on the second phase of the Standardized Climate Scenario Exercise (SCSE) for banks and other financial institutions it regulates in Canada.
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.