NEWS Release - Speech by Dr Andreas Dombret - Member of the Executive Board of the Deutsche Bundesbank - Between global competition and the regional principle – which bank needs which rules? - Speech delivered at the "G20 and Locally Focused Banks" conference
1 Introduction
Finance Minister Dr Schäuble, Mr Haasis , Ladies and gentlemen - Germany is the G20’s host this year, so you could say the world is our guest. Many smaller banks and savings banks sense that, following the financial crisis, the world – in the guise of global regulation – edged a little closer towards them. For quite a few of them, it was too close for comfort.
I keep hearing claims that the "little bank just around the corner" bore the brunt of the major reforms enacted by the international community in recent years.
Just to remind you: the financial crisis spurred the G20 to formulate its intention to address, to the greatest extent possible, all the risks inherent in the exceedingly complex worldwide banking system. Experience shows that a country going it alone isn’t the right way to guarantee the stability of the financial system. These days, the financial system knows no national boundaries, and crises can very easily spill over from one country to the next. This prompted the Basel Committee to set about overhauling, substantially in some cases, the uniform standards that underpin the key ground rules in the banking business.
And because it has always been standard practice to do so in the EU, these rules were then applied across all institutions in Germany. A good case can be made for that. But still, I do wonder whether things really have to be that way? Do we really have to make a choice – between a functioning global competitive environment on the one hand, and the regional principle on the other?
Over the next few minutes, I will outline a number of proposals which I think can better align the supervisory rules with the low-risk operations of small credit institutions in the future while nonetheless adhering to international standards.
2 Proportionality in regulating small institutions
There are already many exceptions in force today to help small institutions manage their compliance workload. However, such exceptions are not special treatment motivated by industrial policy concerns. Rather, they result from what banking supervisors are there to do in the first place – that is, to shield the economy effectively and efficiently from excessive risks and financial crises. This is the rationale behind the principle that high risks necessitate a high level of provisioning. The same holds true in reverse: low risks necessitate less provisioning. It can therefore be concluded from this that relief is always warranted as long as it does not result in risks being inadequately provided for.
That is a principle which supervisors and regulators – including those in Basel, incidentally – took on board some time ago. The Basel Committee, remember, has taken into account differences in the size and complexity of institutions – just take the rules the committee devised to enable banks and savings banks to use different methods to measure their capital. Institutions are generally permitted to use complex models, but only those authorised by the supervisory authorities. Yet there is no obligation to use a model; instead, institutions can also opt for a more straightforward standardised approach. What is more, large and systemically important institutions are asked to meet additional requirements. Global systemically important institutions, for instance, need to set aside more capital in the shape of a separate capital buffer. The aim, then, is not to treat institutions equally, but risks.
We apply this principle in our day-to-day supervisory activities as well. The higher an institution’s risks, the more intensively we will supervise it. The more significant, complex and risky the bank, the more frequently, extensively and intensively we will inspect it. That is why we deploy far more supervisors to inspect larger institutions in our routine SREP examinations at credit institutions. You will recognise the same supervisory strategy in the institutional reporting system. The euro area’s "significant institutions", as they are known, have a standard requirement to report more than 8,000 data points to their supervisors – and to do that quarterly. The reporting templates may be harmonised across Europe, but some business areas are omitted for the smaller institutions. A typical savings bank, then, has to report far fewer data, often just half of the data points.[1]
This practice accommodates smaller institutions running low-risk business models – but perhaps not as much as it could, because there are still some rules whose point and purpose is barely relevant to a savings or people's bank "just around the corner", but which nonetheless impose too much of an administrative burden on them.
On top of that, regulation hasn't exactly got any simpler since the financial crisis. It has been significantly revised and augmented to include new requirements, expanded and stated more precisely. So in its effort to cover every single risk in the complex world of banking, the regulation, too, had to become more complex – and that is still taking a very heavy toll on smaller institutions; too much so, if you ask me.
For small institutions, especially, the work this entails is disproportionately time-consuming and costly. At the same time, many a provision grasps at thin air at small institutions. Just take the existing disclosure requirements, which are there to ensure that large publicly traded institutions are subject to public accountability. Yet market discipline hardly has any bearing for small institutions which are not publicly traded – so why force them to satisfy the same provisions?
page source http://www.bundesbank.de/
