1 Introduction

Ladies and gentlemen

I am delighted to be at this “Banking Evening”. Direct communication with you is very important to me as a Bundesbanker. Such opportunities as this allow me to hear first-hand about the issues that matter to you, without attending official meetings with institutions – and also to perhaps reveal a few things which are particularly important to our supervisors.

I am especially pleased that so many of you have managed to find your way here despite this being the season of colds and flu. I presume it’s been the same here in Stuttgart as in Frankfurt or in other German cities over the past few weeks. Almost everyone seemed to have come down with a cold; entire offices were reduced to a skeleton staff. The worst thing in these situations is when the cold persists. It’s an all too familiar story: due to the never-ending demands of your job and your day-to-day life, you can’t fully rid yourself of it. This often results in a serious relapse. In the worst case, this goes on for weeks or even months.

2 A persistent cold in the banking sector?

Why am I telling you this? Well, I can see a certain parallel to the current situation of German banks and savings banks. The German institutions have been trying to make a full recovery from the bad financial flu they suffered from in 2008 and 2009.

They managed well enough to begin with, but the next burdens quickly followed, and now the institutions are unfortunately still struggling to get completely well again. The low-interest-rate environment depresses banks’ profitability, meaning that only low reserves, if any, can be built up for the next bout of cold; fintechs reduce loyalty among customers, whose readiness to change banks is partly the result of increasing banking charges. Last but not least, many of you are still struggling to fulfil the new regulatory requirements.

All this is hitting a sector which is still “overbanked” and is going through a structural scale-back.

In this difficult environment, many people are particularly worried about the future of the diverse German banking sector. There are fears that the number of smaller institutions could continue to decrease dramatically.

Indeed, the past few years have already demonstrated a clear decline. In the past 20 years, the number of German credit institutions has dropped from over 3,000 to just around 1,900. This decline has primarily been among smaller savings banks and cooperative banks. The number of savings banks decreased by a third, from more than 600 to around 400; the number of cooperative banks fell from approximately 2,500 to just around 1,000 institutions. The question is whether this trend will continue.

Today I would like to address these fears, with one question being particularly important to me, namely: are small banks and savings banks being overtaxed by regulatory reforms? I will also discuss the extent to which relief measures are feasible for smaller institutions.

3 Causes of banks’ woes

There are various possible causes for the banks’ woes. Some perceive the low-interest-rate environment to be the principal cause. Others see the still oversized banking sector as the problem. According to their diagnosis, Germany and Europe are “overbanked”. While some are demanding a moderate scale-back, others are calling for the number of institutions to be substantially reduced.

Still others believe tightened regulation since the financial crisis to be the main cause. Some are clamouring for a general reversal of reforms they perceive to have gone too far, whilst others believe the burdens upon smaller institutions in particular have increased too greatly, and must be reduced.

I am, of course, aware that low interest rates and certain overcapacities present a challenge to German banks and savings banks.

However, I am in particular agreement with the assessment that the burdens of smaller institutions have increased too sharply. The need to act is especially great here, because the diversity of the German banking sector is a precious commodity.

4 Relief for small institutions: decreased procedural demands

For many years now, regulators have taken care to ensure that small institutions are not excessively burdened. This is precisely why banking regulation and supervision frameworks are already largely proportionate.[1]

But reforms in the wake of the financial crisis have made the rules more complicated – above all because they are geared towards large and medium-sized institutions with risky business models.

This has made compliance a much more demanding affair. This burden is considerable for all institutions, regardless of their size. However, small institutions, owing to their smaller staff sizes, are less able to spread the costs of compliance across their employees and have to either hire additional staff or enlist external aid. This leads to proportionally higher burdens.

For that reason, and because smaller institutions pose less of a threat to financial stability than medium-sized to large institutions, granting smaller banks and savings banks further relief is the right thing to do.

But we are also seeing on a daily basis that small institutions are not innocent of misconduct, and not every small institution has a low-risk business model or portfolio, either. Ultimately, every institution in Germany requires strict supervision, because a market can only work to the benefit of its customers if stringent minimum standards which can be relied upon are in place.

What’s more, relief measures for large institutions are not appropriate at all; I don’t see any leeway for medium-sized institutions either. Most of the institutions which got into difficulties during the financial crisis were medium-sized and had unsustainable business models. For this reason, banks with risky business models and medium-sized banks should not receive any relief, or else we would be paving the way for a repeat of the crisis.

But now let’s address the crucial question: what reasonable relief measures can there be for small institutions?

One thing that is of paramount importance to me is this: any relief measures being discussed here have to solve the actual problems – not the minimum capital requirements, but the procedural burdens imposed by the need to comply with complex rules.

In concrete terms, this means the following: when it comes to relief measures for smaller banks and savings banks, the focus must be on removing procedural burdens. On the other hand, capital and liquidity requirements cannot and must not be relaxed.

Our goal should therefore be to regulate institutions with a sense of proportionality without diluting the new regulatory regime. I am committed to ensuring that the debate on greater proportionality is not used as a pretext for lowering capital and liquidity requirements, but that it instead results in an actual reduction in procedural burdens on small banks and savings banks. 

5 But how?

We can achieve more proportionality in two ways. The first is a details-driven approach that involves introducing specific exceptions or adjustments to individual rules.

The second is the creation of separate regulatory frameworks for smaller institutions, on the one hand, and large multinational institutions, on the other.

The details-driven approach has already been pursued in the current revision of the CRR and CRD. In its proposal for a CRR II and a CRD V, the European Commission has emphasised a reduction in the burden on smaller institutions in all reform areas. In its draft consultative document, it has proposed a variety of relief measures and de minimis thresholds, such as in disclosure and reporting requirements. Institutions below these thresholds will be subject to considerably simplified rules, with some requirements even being abolished altogether.

Let’s look at an example of an important area in more detail: the reforms of market risk in the trading book. The Basel Committee had submitted proper, extensive reforms of all market risk approaches for this. These reforms are more risk-sensitive, but also significantly more complex.

Because the new standardised approach is also getting more complicated, it makes sense only to impose it on a limited group of institutions. The Commission’s proposal therefore deliberately distinguishes three groups of banks. First, non-trading book institutions; second, institutions that may continue to apply the standardised approach that is currently valid; and third, the institutions that are to use the new, more complex standardised approach.

To begin with, let’s take a look at the first group of institutions, namely the non-trading book institutions, as the CRR knows them currently. The market risk of these institutions, whose trading-book business is of little relevance, will continue to be calculated according to the non-trading-book regulations. It is good that the current de minimis threshold is set to be retained. However, the absolute de minimis threshold is be extended considerably – from €15 million to €50 million – and we need to take particular care that significant risks below this threshold do not go unnoticed. Hence, I would suggest a critical evaluation.

As for the second group: these institutions are likely to continue applying the current standardised approach in the future as well. It will then be called the “simplified standardised approach”. The Commission proposes this for institutions whose overall business with market risk does not exceed 10% of total assets or €300 million. I support this wholeheartedly.

This leaves us with the institutions with considerable trading book holdings above the aforementioned threshold. These will have to apply the new, more risk-sensitive standardised approach. This will only affect a small number of institutions – probably no more than 60.

You can see, ladies and gentlemen, that proportionality is being extended intelligently and effectively here. We just need to be careful not to set the de minimis thresholds too high, as otherwise there would be considerable risks covered by insufficient regulation.

With that in mind, I would like to return to the conviction I expressed earlier on: relief measures that reduce capital and liquidity requirements need extremely careful consideration. Examples include a number of exceptions with regard to the leverage ratio (LR) and the net stable funding ratio (NSFR). Another is the considerable enlargement of the SME factor. Whereas real economic growth is unlikely to receive any boost, the minimum requirements for institutions’ risk provisioning could be weakened.

The completion of the EU’s reform agenda ought not to result in the depletion of the higher equity ratios that have been achieved; instead, it should reduce procedural burdens. A significant reduction in disclosure and perhaps also reporting requirements may make more sense than these exceptions. Indeed, the proposals could go much further in this regard.

Now for the second approach: the two-tiered system. The fact that work is being done on a details-driven approach certainly doesn’t mean that this fundamental approach cannot be pursued as well.

Specifically, we are talking about a fundamental approach that envisages a dedicated rulebook for smaller institutions – this would systematically address the problem of overburdening smaller institutions with procedural requirements.

In this scenario, only banking multinationals would be subject to the fully loaded Basel III requirements in the EU. This would be appropriate from a risk perspective: we would be regulating global banking institutions under a harmonised set of global rules, while smaller institutions and those operating within a certain region would be governed by graduated rules that are in keeping with their different business models and risk profiles by setting less complex requirements.

The Basel Committee would also benefit from such a dedicated rulebook for banks operating internationally. If the 28 member states knew that the fully loaded Basel standards were only applicable to large, internationally active banks, they wouldn’t have to worry any more about detailed specific national features, but could instead devote their entire energy to the key task: meeting the standards for large, internationally active banks.

I feel strongly that Brussels and Basel should examine this approach with an open mind. Such a systematic approach to relieving the burden on smaller institutions, to the extent that it is deliverable, is generally superior to a patchwork of exceptions.

6 Intelligent, not lax regulation

Ladies and gentlemen, you may know the saying: “Work smarter, not harder”. This is exactly how we should deal with regulation. Nobody benefits when we work harder and harder on ever more detailed regulations – often this just creates the semblance of safety. Instead, we should proceed intelligently: we should consider precisely what objectives we wish to achieve in order to draw up targeted, proportionate regulations.

Our goal is to maintain a diverse banking landscape with an appropriate number of small, also regionally based banks and savings banks.

And now the solution: as you have seen, procedural burdens are the problem that needs to be solved. To do this, we need to cut back the undergrowth of complicated regulations while carefully avoiding the trees that provide support. This means that minimum capital and liquidity requirements may not be touched. This regulation wouldn’t be smarter, just lax.

So how can we achieve this?

First, a willingness for regulation and legislation is crucial. We should advocate a systematic, intelligent trimming of regulations and not a reversal of regulatory reforms, which would jeopardise stability. This goes for all institutions: large, medium-sized and small!

Second, supervisors should check carefully which detailed improvements are possible and how a two-tiered approach could be implemented sustainably.

And last, but by no means least: the institutions themselves and their representatives. It is up to them to make sensible detailed suggestions to supervisors. Wish lists are of little use in reducing capital and liquidity requirements. Instead, they are met with scepticism, whereas intelligent proposals on how to reduce procedural burdens without jeopardising financial stability are a more reasonable approach.

7 Conclusion

Ladies and gentlemen, German banks and savings banks have not fully recovered from the financial crisis in 2008 and 2009 – the challenges of overbanking, the low-interest environment and digitalisation have been too great.

I am very well aware that the ambitious reforms to bank regulation since the financial crisis have not exactly made the situation easier.

But calling for regulation to be scrapped or scaled back in general is a dangerous mistake. To maintain that we would otherwise weaken lending and economic growth is virtually post-truth. These erroneous kinds of statements are not very helpful.

All the same, I consider it objectively reasonable and urgently necessary to relieve the procedural burdens of small, regionally operative institutions.

We can manage this if we streamline complex and elaborate regulations or even abolish them if they are not required. A regime dedicated to small banks and savings banks would be a promising approach to take, in my view.

I believe the German banking sector is moving in the right direction on the whole. And supervision is making progress in following the principle of proportionality.

Let’s continue to work on this together and, on that note, I now look forward to a lively debate.

Thank you for your attention.

Footnote:

1. See A Dombret (2016), Banking regulation and diversity – do we need more proportionality in banking regulation? Speech delivered at the Banking Industry Conference of the People's Banks and Raiffeisen Banks in Berlin, 8 June 2016.