The application of proportionality in European banking sector

Is the approach of the Bundesbank a sign of what is to come?

Banking alert | 2 October 2017


Recently, Dr Andreas Dombret, Member of the Executive Board of Deutsche Bundesbank, delivered a speech on the importance of proportionality in European banking supervision.

As such proportionality exists in a number of areas of European banking supervision such as reporting, in terms of frequency, and minimum requirements for risk management. It is also embedded in the EBA guidelines on the Supervisory Review and Evaluation Process (SREP). Nevertheless, there are instances across the EU where a ‘one size fits all approach’ is applied for supervision of credit institutions irrespective of their size and business model.

An overview of Germany’s proposal for the application of proportionality

The Bundesbank in Germany has been extensively working on a proposal for the effective application of proportionality. Their proposal introduces two routes for applying proportionality: either adjust the existing regulatory framework or design a new framework specifically for LSIs. The proposal, which has been discussed between German politicians, supervisors and banking industry participants, seeks to alleviate the burden of regulation on LSIs with simple business models.

The proposal sets out a three-tier approach whereby all banks are categorised as either systemic banks, medium-sized banks or small, less complex institutions. This proposed categorisation determines the mode of application of proportionality:

  • The systemic banks, which are the smallest group in terms of numbers but have the greatest impact on the financial stability, will be subject to Basel III in full without any simplifications;
  • The medium-sized banks, which are less significant but still have greater risk exposure than LSIs, will have some targeted relief measures by making specific amendments to existing regulations; while
  • The less complex institutions will be subject to a separate, more simplified regulation, referred to as the ‘small banking box’.

What are the criteria for banks to be included in the small banking box?

Size is not the only criteria for qualifying for the new simplified framework. The Bundesbank’s proposal considers additional criteria, including:

  1. Only banks that would be subject to insolvency proceedings in the event of resolution may be part of simplified regulatory regime;
  2. Banks may not undertake any notable capital market or cross-border business;
  3. Banks should have, at most, small trading and derivatives books; and
  4. Banks should use the standardised approach for calculating risk weighted assets.

The final decision on the inclusion of LSIs in the small banking box will rest with the supervisor so as to minimise the exposure of riskier business models from being part of the simplified regime.

Proportionality at the European level

The aim of the minds behind the innovative supervisory regime presented in the German proposal is to ultimately achieve acceptance within the European context. In fact, this proposal, which was written in collaboration with the Specialist Working Group on Proportionality, is now in Brussels where it will be used as a basis for further discussions about the application of proportionality at the European level.

How we can help

Deloitte’s Banking Risk Advisory team specialises in industry-specific risk, regulatory and strategic consulting.

We have worked with banks to assess their status quo, determine the required change, and set out their transformation plan to achieving compliance with the applicable regulatory and supervisory framework. The combination of our experience and broad knowledge of prudential regulation positions us to assist you in applying the principles of proportionality to achieve compliance in a manner that is tailored to your business model and risk profile, while meeting the expectations of the regulators.

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