A glance at the bare numbers shows that banking regulation is cumbersome. The European Capital Requirements Regulation (CRR) now runs to more than 650 pages. It is supplemented by the Capital Requirements Directive (CRD), which adds another 165 pages to the regulatory framework for banks. And the national law implementing the latest amendments to EU banking regulation in Germany weighs in at 360 pages. On the other hand, BaFin’s Minimum Requirements for Risk Management (MaRisk), at 56 pages, are a model of slimness. Implementing any amendment to regulation is a “stress test”. And there are several of them every year.

If we consider that Germany’s smallest savings bank has around 50 employees, several of whom deal with regulation, this raises the following question: is the effort involved still appropriate? 

Robust regulation and supervision of banks is the foundation of a healthy economy. The severe fallout from the major financial crisis of 2008 is a good example of the severe impact of inadequate regulation and supervision. The resulting tightening of regulation and supervision in the EU has helped the EU banking sector to withstand the recent turmoil unscathed. 

Despite the success of the current rules, the Bundesbank and BaFin propose a different and novel approach for the small regional banks of Germany and Europe. Why? Because they have to invest more time and effort – relative to their size – into fulfilling these rules than their large competitors. Smaller banks’ regulatory costs, measured in terms of total assets, are significantly higher than those of large banks; this area of the playing field is not level. Proportionality is missing here.

Banking supervisors have been working for a long time to increase proportionality in regulation. In the process, we have implemented a host of measures. At the same time, we have learned that is is indeed possible to simplify regulation for smaller banks without watering down safety standards. However, we have reached a point where an incremental approach is no longer viable. We now need to dare to take a “bigger leap”.

That is why BaFin and the Bundesbank have put forward a proposal for an EU-wide regime for small banks which incorporates our decades-long expertise as well as experience from other countries, such as Switzerland. 

Our goal is to reduce the regulatory burden on small and non-complex banks that use traditional business models without compromising on capital and liquidity buffers – quite the opposite, in fact. 

At its core, the proposal would do away with complex, risk-based capital requirements and replace them with a more simple leverage ratio. As the sole capital requirement, this ratio would be well above the Basel III minimum of 3 per cent. A high requirement will ensure that, despite the simplification, sufficient capital is available to absorb potential losses. Most of the liquidity requirements would also remain in place.

Under the new regime, smaller banks would no longer have to use their resources, which are smaller than those of larger banks, to identify the appropriate risk weights for every single item on the balance sheet. It would eliminate the need to gather, process and update the data required for this calculation and would simplify extensive regulatory reporting. It would also reduce the frequency and scope of reporting and disclosure requirements. 

The proposal is aimed at small banks with total assets of less than €10 billion, a clear focus on business in the European Monetary Area and a simple business model. Participation in the regime is intended to be voluntary. Around 1,000 banks in Germany could formally qualify, many of which today already hold capital considerably above regulatory requirements.

The new regime would free up banks’ resources for their core business. In addition, we could focus our supervision even more effectively on pressing issues such as IT and cyber security. 

Yet would the cost of this regulatory simplification be that financial crises are more likely? Quite the opposite, in fact. The eligibility criteria would ensure that only those banks whose insolvency would not pose a systemic problem in the financial sector could take part. And such radical simplification would only be possible in conjunction with a sharp hike in debt ratio requirements. Many economists have been backing such an approach for a long time already. 

In future, our financial system and our real economy will continue to depend on both types of banks: big international banks and small regional banks. This is because they perform different functions. But if small banks are treated the same way as big banks, they can no longer fully perform their important functions. That is why we need a paradigm shift in the regulation of small, regional banks. However, this can only be decided at the European level. This makes it all the more important for German supervisors to actively contribute their ideas to the current debate.

Michael Theurer is the Bundesbank Executive Board member responsible for banking and financial supervision and financial stability. Mark Branson is President of the Federal Financial Supervisory Authority (BaFin).