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LONDON, 10 December 2015 – The Banking Stakeholder Group of the European Banking Authority released today an unprecedented report that calls on EU supervisors and policymakers to better apply the Principle of Proportionality to find a balance between costs and benefits of EU financial regulation.
Aimed at the European institutions and authorities as well as supervisors at both national and European levels, the 58-page report which includes several case studies showing how the principle could be applied to the fullest extent possible, also establishes a set of high-level and technical recommendations to promote the Principle of Proportionality in all aspects of regulation.
The BSG judges that, following the enormous intensification of bank regulation since the crisis, there is a need to take stock of how regulation has evolved with particular regard to the key issues of proportionality and complexity. In particular, the report considers whether the total sum of regulation (independently of particular regulations) has become disproportionate.
The group concludes in the report that 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.
In its detailed analysis of the various dimensions of proportionality, the report highlights in particular problems associated with excess complexity, the totality of regulation, and insufficient differentiations made between different types of banking institutions across the EU. With respect to differentiations, the report highlights the disproportionate burden of some aspects of regulation as applied to small banking institutions which carries with it the danger of impeding new entrants to the banking industry.
The BSG group provides a set of high-level and technical recommendations to reach a cost-benefit balance by EU supervisors and policymakers:
The costs of disproportionate regulation are likely to be substantial. Applying proportionality to regulation directly or indirectly affects all aspects of economic activity by the banking system. Disproportionate regulation may force banks to pare down lending activity as they become unnecessarily more risk averse. Perceptions can also surface that regulators are effectively taking over bank decision-making from bank managers or bank Boards. Arbitrage may occur within the banking system as business migrates to less-regulated institutions and the capital markets, undermining financial landscape diversity. Banking system competition could be compromised, inhibiting financial innovation. Knock-on effects will be felt by consumers and bank workers, who will ultimately pay at least part of the costs of disproportionate regulation.
The report's findings are supported by six case studies that explore the role proportionality plays and illustrates its application in supervisory reporting, liquidity, external models, governance related to risk models, the leverage ratio, and corporate governance. For example, 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. The question arises as to whether the costs of reporting requirements imposed in particular on small institutions are disproportionate to the value of such reporting. Likewise, the leverage ratio seems to be an area where the Principle of Proportionality should prevail. The introduction of the leverage ratio as a compulsory minimum ratio will ultimately have an impact on the business structure of credit institutions, harming in particular banks with low-risk but high-volume business. The design of the leverage ratio would benefit from taking into account banks' different business models.
Download a copy of the BSG report here.
David T. Llewellyn, Chair of the BSG
+(44) (0) 1509 222700 / + (44)(0) 7949 786287 (mobile)
Chris De Noose, Coordinator of the BSG ad hoc Working Group on Proportionality
+32 2 211 11 57
Notes for Editors:
About the EBA Banking Stakeholder Group
The Banking Stakeholder Group of the European Banking Authority is a group composed of 30 stakeholders representing credit and investment institutions, their employees' representatives as well as consumers, users of banking services and representatives of SMEs, and top-ranking academics. The Banking Stakeholder Group is consulted by the European Banking Authority on actions concerning regulatory technical standards and their implementation, and also consultation papers, guidelines and recommendations made by the EBA. The group may also submit opinions and advice to the EBA on any issue related to the work of the authority.
Level 1 and Level 2 EU legislation
BSG refers to different levels of EU banking legislation and regulation as follows: