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Policy perspective: proportionality

Policy perspective: proportionality

​In the upcoming edition of News & Views, Mr. Carlos Trías Pinto, member of the European Economic and Social Committee (EESC), shares with us his thoughts on the need to keep a diverse financial landscape, which should include locally focused savings and retail banks. 


>> EBA BSG Proportionaility Paper

>> WSBI-ESBG stance on proportionality

>>EESC opinion on role of cooperative, savings banks in territorial cohesion


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BRUSSELS, 24 June 2016



​​​​​Mr Trías Pinto authored in February 2015 the EESC opinion The role of cooperative and savings banks in territorial cohesion - proposals for an adapted financial regulation framework (off-site link). The opinion is important because it identifies the need to preserve the "biodiversity" of the financial system, without this meaning the arbitrary application of rules. It also focuses on the need for an introduction of calibrated financial regulation frameworks to consider the specificities of cooperative and savings banks, avoiding the undesirable effects of uniform application of prudential rules and possibly an overload of administrative burdens. The opinion refers also to the adequate application of the proportionality principle in banking rules, bearing in mind the local dimension.

Why this opinion? What beliefs brought you to come up with such a text? 

The financial crisis that exploded in 2008 forced monetary authorities to react strongly, especially since the renewed Basil agreements to the Banking Union, which set up prudential criteria to bring a robustness and stability to the system. While welcoming this response, a problem arises when there is a willingness to apply the same rules to all financial players, without taking into account their specific characteristics. In this sense, the EESC opinion strives for the application of the proportionality principle, a key element to preserve the diversity of the financial system. 

Which are the tasks, functions and challenges that the financial sector needs to assume so as to be able to reinvent itself and survive (in particular the smaller actors)? 

The financial system should serve the needs of the real economy. Public authorities are obliged to support those entities which are best in fulfilling this function. This being said, the entities themselves, beyond preserving these characteristics that justify special protection (such as client proximity, capillarity of the commercial networks, links with local production, cooperation, social mission) they need to improve internal risk management processes, which underpin the top management decision making, focusing on financing those sectors they best know, and boosting good corporate governance.  

How can smaller actors keep their social function? 

Regulators need to simplify the life of those smaller actors that hold a key role in financial management. This is notably because, in numerous occasions, they have strong financial inclusion vehicles that reach rural areas that normally have difficulties to access services. It would make sense that, beyond a more flexible and adapted application of regulation, the European Commission should also open the door to these actors to the management of structural funds.  This is a matter strictly linked with the DNA of these institutions, removing bureaucratic and administrative barriers. 

Notwithstanding this last note, smaller entities in some occasions will need to look for alliance formulas or strategic groupings to gain robustness and generate economies of scale. 

Is there a need to sensitise regulators to facilitate that savings banks and other local banks continue to play a key role in the European construction? 

It is absolutely necessary to carry out an intense work with regulators, with a particular focus on the European Commission, given that this body is the guardian of the EU Treaties and can initiate legislative processes. 

From my personal experience, it seems that there is not a lack of understanding towards social banking models, but rather a profound ignorance of what makes up this customer-centric, locally driven models. The outgrowth of that normally leads to approaches that miss the boat. There is a need to carry out – as a priority - a set of meaningful working sessions with the European Commission (DG FISMA).
 

How do you believe that the proportionality principle should be taken forward in future regulation? 

In my opinion, we have to first acknowledge that the European Commission is taking into account the proportionality principle, but they could do more.  In these times of financial turmoil, it is increasing relevant to guarantee that (ex ante) prudential contributions to the Single Resolution Fund are done in an adequate manner, pursuant to an objective evaluation of risk parameters.

They hoovered up windfall profits during fat years from investment banking. At the same time, they carried out speculative activities without due consideration to the common good. People are questioning whether the large banks' judgement worked, especially in the aftermath of the "Big Recession". Are they stronger now? Are they viable business that can thrive in the long term? Was it worth the risk when annual loses that ran into the billions of euros were realised, thereby eroding solvency? These questions must be addressed.


​European Economic and Social Committee stance on savings and retail banks

  • considers savings and retail banks, along with cooperative banks, vital to preserve the "biodiversity" of the financial system, without this meaning the arbitrary rules apply;
  • applauds the consideration the European Commission has given to the introduction of calibrated  financial regulation frameworks to consider the specificities of cooperative and savings banks that avoid the undesirable effects of uniform application of prudential rules and possibly an overload of administrative burdens;
  • reminds that the main problem remains the adequate application of the proportionality principle in the new banking rules (especially regarding the Capital Requirements Directive – CRD IV and the Capital Requirements Regulation - CRR);
  • sees the strictest requirements being applied to global banks, stringent requirements should apply to pan-European banks (of a systemic nature in Europe) and more flexible requirements should apply to national and local banks;
  • has always been committed to a level playing field, and therefore recommends the use of objective parameters that justify a specific regulation for each business model. Those paramatersinclude financial and economic performance, contribution to the real economy, risk management, and governance; and
  • proposes that financial authorities should offer incentives to those actors who best comply with these conditions. Calls for stronger ethical standards and codes of good governance for all kind of banks, as these are vital for restoring lost confidence. 

>> EBA BSG Proportionaility Paper

>> WSBI-ESBG stance on proportionality

>>EESC opinion on role of cooperative, savings banks in territorial cohesion


Proportionality; Regulation; European Institutions; European Supervisory Authorities (EBA-ESMA)