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Proportionality Task Force seeks EU banking rule balance

Proportionality Task Force seeks EU banking rule balance
​​​​​​BRUSSELS, 3 May 2016 – A re-formed ESBG task force met today in person for the first time to focus on the need for a proportionate approach to banking regulation.

Held today at ESBG offices in Brussels, the half-day session of the ESBG Task Force on Proportionality began with a technical discussion whereby members were invited to make a tour de table to present and elaborate on the topics which, in their opinion, should be addressed. An update on political discussions followed, giving members a chance to learn from the ESBG policy team about recent political discussions around proportionality. The morning session also included discussion on how best to organise data collected by ESBG from its members to better back up the banking associations' arguments around the need for the principle.

Task force builds on momentum of proportionality report

ESBG announced in March that it would relaunch the policy-focused task force to concretely apply the principle of proportionality to EU banking rules. The task force, comprised of 11 people representing nine ESBG member banks from across Europe, aims to continue the momentum generated since the release late last year of a report on proportionality published by the Banking Stakeholder Group (BSG) of the European Banking Authority. The 58-page BSG report called on EU supervisors and policymakers to better apply the principle to find a balance between costs and benefits of EU financial regulation. 

About Proportionality

Proportionality is about balancing the costs and benefits of regulation. If regulation is disproportionate in relation to its objectives, the cost-benefit calculation will likely worsen. The high-level and technical recommendations contained in the report should be largely taken on board in order to provide an important reference for promoting the Principle of Proportionality in all aspects of regulation.

Proportionality and EU banking rules

One policy area the task force sees the principle better applied is supervisory reporting. Financial institutions of less complexity and/or smaller balance sheet size usually pose less of a risk to the economy. A proportionate approach to supervisory reporting would allow authorities to obtain the information that they require to accurately evaluate the financial institutions without enforcing a disproportionate cost on institutions.

In addition to supervisory reporting, solo and consolidated reporting for the Liquidity Coverage Ratio (LCR) / Net Stable Funding Ratio (NSFR) [Articles 6(4) and 11(3) CRR] remains hot-button area for members. The requirement for consolidated reporting could result in a disproportionate effort in cases where the entities to be consolidated are fairly insignificant. The burden for consolidation lies in operational efforts and obtaining the relevant data in the first place. The situation becomes yet more complex in cases where the entity that needs to be consolidated is not subject to the capital requirement regulation (CRR). ESBG and its members see a need for the requirement for insignificant entities be waived, which would entail a definition of "insignificant". This definition could, for example, use already-existing approaches applied in other legislative areas such as CVA-charge or non-centrally cleared derivatives. If the entity is truly insignificant, key indicators of the LCR/NFSR should not show much variance when applying the solo versus consolidated approach.

As policy relates to liquidity, namely the challenge of the EU delegated act on the implementation of the LCR, it is important that the Principle of Proportionality reflects the diversity of the balance sheet of banking institutions which contribute to the financing of the economy.

The leverage ratio also poses a challenge, as its introduction as a compulsory minimum ratio will ultimately have an impact on the business structure of credit institutions. The adjustment to the new requirement will potentially result in higher costs and might entail unintended consequences. Given its outline and design as a Pillar 1 requirement, the leverage ratio might especially harm banks with low-risk but high-volume business. As a differentiated approach is being considered during the preparatory work and analysis of the EBA and the European Commission, a differentiated level of the leverage ratio could be applied, reflecting the actual level of risk. Certain institutions also could have a longer implementation period to allow more credit to be available.

The ECB AnaCredit is another area where there is need for greater use of propotionality. The project requires banks to report on more than 100 data points, which increases the administrative burden for all banks and subsequently the IT costs are vastly increased. ESBG sees a solution: a common industry banking data model with harmonised definitions and technical standards would ensure standardised IT implementations and aligned processes as well as comparability between different requirements and reports across countries. Within this harmonised banking data model, the principle of proportionality would have to be ensured in order to allow for simplifications and thus a reduction of administrative burden for smaller institutions that form part of a banking group.

​The next meeting of the ESBG Proportionality Task Force is planned for June.


>> Discover the Task Force on Proportionality

>> Learn about the 15 January 2016 report forum 

>> Read more about ESBG positions 

>> See the EBA BSG Proportionaility Report

Proportionality; Liquidity ratio; Capital Requirements Directive and Regulation; Liquidity standards; Liquidity risk; Supervision; Regulation; Accounting Standards; Financial reporting; European Institutions; EBA Stakeholders Group