National Bank of Estonia, Deputy Governor
Danish Financial Supervisory Authority - Finanstilsynet, Director General
Deutsche Bundesbank, Member of the Executive Board
European Commission, Director, Regulation and Prudential Supervision of Financial Institutions, DG for Financial Stability, Financial Services and Capital Markets Union
European Banking Authority, Director of Regulation
European Central Bank, Director General, Directorate General Micro-Prudential Supervision III
Bank of Valletta p.l.c , Chief Executive Officer
Nykredit Bank, Member of the Executive Board
Deutscher Sparkassen- und Giroverband, Executive Member of the Board
1. The four key outcomes from the call for evidence: a better combination of banks soundness and economy funding, the need to alleviate excessive regulatory burden and improve the regulatory consistency, and need to introduce of proportionality in bank regulations
An official said that in November the European Commission presented the conclusions of the call for evidence. The main message they had heard was that the overall framework was sound. They had not seen very strong economic and quantitative evidence about what major changes needed to be made. At the same time, they identified improvements in four main areas.
The first of these is the funding of the economy. In light of this, the Commission had looked at number of risk weights in relation to SMEs and infrastructures, as to whether they can be modified to allow banks to better fund the economy whilst still being very safe from a prudential standpoint.
The Commission has heard the messages on the overall regulatory burden, and in particular on reporting. The Commission has made proposals to alleviate the reporting burden, particularly looking at their CRD proposal or the plans they have in respect of the EMIR legislation.
The third key message relates to inconsistency between various pieces of legislation, of which there have been many examples. One particularly striking example concerns the combination of the leverage ratio calculation and the central clearing requirements stemming from the G20. Many had taken the view that there are objectives that are difficult to reconcile, and the Commission has acted upon that in their legislative proposal on CRR-CRD.
Finally, the fourth main theme that emerged has been proportionality, with a fairly strong demand from some parts of the banking sector to introduce more proportionality into the framework. The message that the Commission has received is that regulation in Europe can better reflect the size of banks, their business models, their systematic significance, complexity and cross-border activities.
The Commission has looked at these, and have tried to build on them in order to table legislative proposals that will respond to most of the concerns expressed. The proposals on proportionality are fairly straightforward. The Commission had introduced proportionality with respect to disclosure requirements, and had looked at a number of targeted measures in the CRD. This included the trading book, where they do not think that banks with smaller trading books should apply the new trading book rules. The Commission also looked at remuneration, where they propose to exempt smaller and less complex banks from certain requirements. Adding to this, the Commission is asking the EBA to develop an IT tool that can help small banks to navigate the complexity of the regulatory framework.
These are the proposals that the Commission has made, and on the whole, they have been well received in the Council. They are seen as striking the right balance between different views on the subject across member states. Of course, some countries wish to go further in the context of a possible future legislative proposal, and the Commission are open to this possibility. However, this will have to be well crafted, in order to avoid regulatory arbitrage in the single market.
2. The Commission has already identified the right regulatory areas to make bank regulation further proportionate without lowering quantitative requirements for capital or liquidity
2.1. Proportionality already exists to a very large extent
A central banker noted reference to the EBA as having a role, according to the Commission proposals, in helping smaller banks to navigate the regulations and help with specific tools. They asked a regulator to comment on how the role of the EBA would develop, and what lessons have been learned so far regarding proportionality.
A regulator said that they agree that proportionality is very important, especially in Europe. This is the dimension and the bridge by which global rules can be applied for one diversified market. The most important aspect is having proportionality well embedded.
Proportionality already exists to a very large extent. The EBA uses many criteria, such as the size of the activity like the trading book, and even business models. It has appeared in EU regulation. Proportionality did not exist originally, but is now in place to some extent. Cooperative features and path through banks exist to some extent as well, but this is where the topic also becomes complex and is not well perceived. It is complex to reflect the diversity, even if this is not the full diversity.
A central banker wanted to make two general points: the first is that the framework already contains proportionality, in the sense that supervisors can apply it with their supervisory discretion and the ECB can apply a risk-based approach. When the SSM designs the less significant institution (LSI) supervisory common approach, the ECB follows the proportionality principle. For instance, the frequency of the SREP assessment or the reporting requirements that have been simplified in FINREP or the design of the national options and discretions application where, for the smaller institutions, they are not requiring separate board committees or audit and risk committees. The ECB can already do a lot, and already has done a lot, in the supervisory field.
2.2. There is room for making rule further proportional and clear but it is not about lowering quantitative requirements
A central banker said that they want to be a bit more provocative: whilst they believe that there is still room for improvement in the Commission’s proposals, they commended the Commission for what they had done. He believes that there is some room for improvement, but the Commission has identified the right areas to work on. If he has further suggestions, they will be that they would not necessarily add further areas to this, as the areas that have been mentioned are the right ones where proportionality needs to be strengthened.
Yet an official had received the impression that some want to go further with proportionality and that some want to go less far, or take the view that the balance that is being proposed in the draft legislation is the right one. They had been reminded that, before the Commission made its proposals, proportionality already existed in a limited way – MREL being a case in point – and they should not lose sight of that. That is why, going forward, an official believes that what has been proposed should be fine tuned. There is still a year or more to go in negotiations over the CRD package; institutions should do a good job with what is on the table, fine tune what the Commission has proposed, and then leave time for these new rules to bed down so that they properly understand how they function and, if need be in the future, can pick up the issue. There is an opportunity now; they should try to seize it and create a proportionate arrangement for the banking system soon.
A central banker noted that proportionality is not about lowering quantitative requirements for capital or liquidity. That is not the idea, and nor will proportionality serve to ease regulation across the board.
A regulator said that the other sound principle in economics is that ‘there is no such thing as a free lunch’, which also applies here. Whenever they have to apply proportionality and make things lighter, a consequence must also be that the requirements, in terms of the limitations on what institutions that are regulated in a simpler manner can do, have to be more restrictive. A small bank should do business at a very different level if they are regulated much more lightly compared to a big bank. Likewise, for specialised banks, special requirements should apply in order for them to be regulated in a different manner to big banks.
A central banker said that, regarding the Commission proposals, the ECB, like their national institution, thinks that the items that the Commission are selecting for proportionality are correct. Remuneration rules, disclosure rules and fit-and-proper rules are the areas where things can be simplified for the small institutions. The ECB feels quite strongly about this. The frequency of reporting for even the smallest banks should not be reduced from quarterly to annually, because supervision would not be effective without an up to date picture of solvency. With annual reporting, it might be 15 months before it is realised that a bank is insolvent. They should, however, discuss the scope of the reporting, because very detailed information is not necessarily required for the smallest institutions.
A banker said that they represent a number of smaller and less risky financial institutions with an average balance sheet size of about €3 billion. They are quite pleased about the frequent mentioning of proportionality, as shown in recent Eurofi conferences. Only half a decade ago, mentioning proportionality was perceived as just a ‘complacent complaint’ by those institutions that did not cope with competition. Now, the concept of proportionality in banking was widely accepted. They did not want to mention the number of pages that the EBA had published last year, or studies about the burden of regulation in the United States and in Europe and the number of employees that an average savings bank has to hire in order to cope with all the compliance and regulatory costs. Today, regulation without proportionality is perceived to be a sort of operational risk for smaller and less risky banks. That is why there is discussion about proportionality in banking.
Despite all the statements from regulators and of those around the table who are claiming otherwise, the European approach to banking regulation still resembles a one-size-fits-all approach with common binding rules for all. In particular, the term ‘single rulebook’ is unambiguous in this regard. There is still a need to discuss how proportionality in banking is applied, and it should be applied in a way that provides some relief for less risky and smaller banks.
The proposals of the European Commission that have selectively incorporated elements of proportionality in the current proposals for the revision of the EU banking regulations are welcome. They point in the right direction.
A regulator noted one area in which proportionality is being restricted, in relation to capital requirements. The latest idea to come out of Basel is the ‘output floor’. In some ways, this ties the regulation of very simple institutions together with very complicated institutions, and they would query this; one principle of economists is the Tinbergen rule, which suggests that at least one instrument is needed to achieve one objective. Here, the aim is to use the standardised method to measure both the risks in small banks as well as the risks in large banks, which is a very difficult exercise. One should be very cautious in increasing the complexity for small banks and, at the same time, making the big banks subject to very simple rules.
Another challenging area is that of SIFI and MREL requirements: there is a lot of differentiation here, and the potential to create some challenges, in the sense that the safety and soundness of banks will be very different according to whether SIFIs are subject to the full MREL requirements or only to TLAC. That will have huge implications that have yet to be realised, in terms of the banking structure and in terms of where one can and cannot bank safely. They did not think this has been necessarily thought through. Those are two areas in which Europe may be heading in a direction in which more thought is needed.
3. Proportionality - i.e. regulatory fairness - promotes fair competition and safeguards the diversity of the financial system
A central banker feels that proportionality promotes competition and enhances the resilience of the financial system as a whole, because by having more proportionality they are safeguarding the diversity of the financial system, which makes it more competitive; safeguarding diversity, instead of unintentionally setting barriers to entry.
A ‘one-size-fits-all’ approach is never a good idea, particularly in regulation. It is always very inefficient, not only for institutions and banks, but also for supervisors, because it means that they have to assess everything at the same time, and they are not focusing on the right issue. If they consider proportionality, they also consider effectiveness.
An official agreed fully that proportionality is an important concern, and that there should not be an undue compliance burden on the small banks, which are very important for the economy. The diversity of the banking sector is an asset.
An industry representative said that with Malta being the size that it is, the Bank of Valletta is the largest bank in Malta but, by international standards, it qualifies as a small- to medium-sized bank. However, it is also a systemically important bank to Malta’s economy (D-SIB), and therefore that puts more onus on them and other systemically important institutions.
Proportionality is about finding the right balance between regulatory oversight of the banking system and not rendering the banks sterile; in other words, making sure that the banks are not neutralised. They should be made safe, but not sterile, and this is a difficult balance to strike. The chair of the Single Supervisory Mechanism had stated a couple of years ago that the new SSM that arose in November 2015 would be intrusive, ‘tough but fair’. An industry representative agreed that it should be so: it is certainly intrusive and tough, and that is the way it should be. With regards to fairness, they understand the principle of proportionality. When discussing fairness, there is a need to ensure that the proportionate impact of regulation is respected according to the circumstances of each institution.
4. Proportionality is not just talking about the size of the balance sheet or the administrative burden, but also affective transmission of monetary policy, the impact of bank regulations on the financing of the economy and domestic financial markets, and the consistency of the regulations across all financial sectors
An industry representative agreed that when people talk about proportionality, they are not just talking about the size of the balance sheet or the size of the net assets but also the business model, the risk profile and the systemic significance of the bank. These have to be taken into account as well. When people talk of proportionality, they should wean themselves away from talking about size and size alone, and talk also about risk profiles.
Secondly, they were pleased to note that the discussion on proportionality is shifting away from its prior focus, which was mostly administrative. In other words, they are mostly talking about the burden of compliance costs, of regulatory returns, of the size and the frequency and the volume of data required. That is obviously important because that is a question of costs, which, in turn, weighs on capital as well. However, they sensed that the discussion is now shifting towards the economic impact of proportionality. An industry representative also joined others in commending the Commission on the proposals that it has made in the wake of the last call for evidence, especially when they are talking of SMEs and infrastructure projects that have been given some significant capital relief. That is the right way to go and they should be going there.
Given that Malta is a particular case in the EU, they are talking about a small economy where about 95% of the economic operators are SMEs. Over here, they are really feeling the relationship between proportionality or the lack of proportionality and the financing that they are extending to SMEs. There is an influence of regulation on the supply of credit. In a recent survey, in fact, one of the main complaints about Malta’s attractiveness as a place of investment was the difficulty in accessing credit for SMEs, part of which obviously is the burden of the cost of capital that they are having to allocate to SME lending. That is why it is important. Although Malta is a small case with a large number of SMEs, there are large parts of Europe where SMEs are by far the largest operators within the economy. It is important that this shift is maintained, the shift away from talking about administrative issues and talking more about capital allocation and proportionality of capital allocation in relation to the risk profile and the business model of banks.
Finally, industry representative explained that proportionality will help to support the transmission of monetary policy in Europe. At the moment, Europe’s monetary policy pushes and incentivises the finance of the real economy through interest rates and through negative rates. However, that transmission of monetary policy may be somewhat contradicted by what is seen as onerous capital requirements, at least where relatively safe banks and banks with simple business models are concerned. The Commission should continue in the way that it has started, as it is a very encouraging start, and consider more possible measures where capital relief to simple business models is provided to ensure a more effective monetary policy transmission.
A central banker concluded by stating that all parties should aim to support lending to SMEs but, at the same time, this sort of lending can sometimes be quite risky. There is a right balance that needs to be found when it comes to setting the capital requirements, which could be discussed further.
An industry representative highlighted the impact of regulation on pass-through models, and other specialised banks, and the need to also support business models that can fund the real economy. It is very important to look for well-functioning business models and try to support them. It is about protecting them but, being special banks with special rules and special requirements, it is also about allowing them to have capital requirements that are in line with the risk that they take.
The output floor from Basel is a problem in this context; Europe should find a way not to disproportionately affect mortgage banks, or other low risk business models. Such business models have been proven to be safe throughout the crisis. There seems to be some carve-outs from the proposal as it is now, and this should generally include all the different business models that have low risks.
Another issue is that it is not only the well-functioning business models that should be considered in terms of proportionality, but also the well-functioning markets; Europe should try to protect these, and to perhaps make them bigger. One of these is the covered bond market, in particular in Denmark. The rules arising from FRTB and from Basel IV will affect participants in this market disproportionately, because the capital requirements for holding covered bonds will be based on a stress that is three times stricter than what has been seen in the Lehman Brothers crisis. A way of trying to build that into the legislation would be to look at the covered bonds in the different credit risk categories.
Another industry representative had one last point about proportionality. He suggested to also focus on proportionality between the regulation of the banking sector and the regulation of other financial services. Obviously, there is always the risk of over-regulating one sector, i.e. banking, in respect of the others. The consequence is pushing risk out of the banking sector only to have it reappear in different forms in other less segregated sectors such as fintechs and capital markets. It is therefore important, as a regulatory view, to focus on the entire industry and not just segments of it.
5. The definition of a detailed list of exceptions or the creation of a “small-banking rulebook”: two possible but complex options to improve regulatory proportionality, which require stabilising beforehand the criteria to target small and low risk banks
A regulator said that clearly, differences exist: there are public sector banks with ‘sky-high’ solvency ratios but extremely low leverage ratios, and likewise in terms of different kinds of banks. On the other hand, a regulator has a lot of sympathy for creating a common rulebook for Europe. If someone were to start from scratch, using something other than the Basel standards, it would be incredibly difficult to build these common rulebooks across different sectors.
Secondly, a lot of proportionality already exists, both in terms of requirements on reporting, and in terms of standardised methods, vis-à-vis the advanced methods with regards to the capital requirements and the SIFI requirements. The question is whether Europe should proceed further in this direction and whether they can administer it or not.
A central banker said that Europe has two options on the table for improving proportionality. The first option is the one that the Commission has taken, and the Commission is a case in point, although they are not being negative: they have a detailed approach where they think about exceptions, go through the list of what is allowed, and consider what exceptions should be made. This is what the Commission has done, but it may not be enough. The more provocative and fundamental approach is to create a separate set of rules, rather than going through the list and creating exceptions. This is described as the small-banking rulebook. The next step would then be to think about introducing a set of rules tailored towards small institutions with small risk profiles.
An industry representative said that a good example of these efforts made by the Commission could be found in the areas of reporting and disclosure in CRR II and CRD V papers. However, again, they are disappointed that the alleviations in reporting and disclosure seem unbalanced: they are still very isolated and tied to a very low total asset threshold of €1.5 billion per credit institution. There is no need for additional thresholds such as these, but Europe should rather build upon those that are already in place.
However, when catering for the specificities and the diversity of the European banking landscape, there is a need to take into account systemic relevance, the risk profile, the complexity of the business model and the extent of cross-border activities. It is now time to introduce a new concept of proportionality, in the form of a small, agreed, but simple banking box for those banks that are not systemically important. That means that Europe needs to revisit the original Basel proposals, which take into account the risk of a financial institution for the banking system or for the financial system. Even a small bank can be risky. If they are going to define a set of criteria that defines the application of proportionality in banking, it should be based on a set of criteria that is a combination of size and riskiness of a financial institution. Perhaps they should take the definition that the EBA has provided. They should apply a small and simple banking box to all those financial institutions that are non-systemically important under the EBA’s Guidelines on the identification of ‘Other Systemically Important Institutions’ or O-SIIs.
In a regulator’s view, there is a practical problem with the EBA helping to navigate a single rulebook or two sets of rules in that it becomes complex: a bank with a small trading book is perhaps not a path through bank, because it needs those kinds of activities. Finally, such a subset of banks would never be targeted, because there is no single subset of banks that benefit from the single simplicity of the book.
This is ultimately, where efficiency is lacking. There are many tools, but a traditional and simpler bank cannot recognise itself and is not fully targeted by greater simplicity. This is where progress has to be made, but to achieve this, the common subset of banks to be targeted across the book needs to be identified. This is risky, because it is never clear what a bank’s risk levels will ultimately be, and this is where policy arbitrage becomes relevant.
An official entirely agreed on the fact that it is not just the size of the institution that matters, but also the risk profile and the systemic relevance. However, in order to take this into account, it is not necessary to have a separate legal framework for smaller institutions, because they can already take this into account in the current framework. For instance, this is fully taken into account in the SREP model that is now being designed for the SSM. Institutions are classified on the basis of not only size, but the risk and the impact, meaning the systemic impact for the local economy. The frequency of the SREP assessment is also based on this. A low priority institution that has small risk and a low impact will have an assessment every three years. The information requirements will also be lower. A risk-based approach can be applied, taking into account the risks embedded in the business model and the systemic impact already in the framework that is following the EBA standards.
Secondly, the idea of substituting the supervision of small institutions by high enough capital requirements is quite dangerous. It is generally recognised, based on what has happened in the past, that small banks have also failed, that they are risky, and that the source is often weak governance, which results in high risk taking and high NPLs. In the past, smaller banks have been found to be systemic and have been subject to resolution. If the market conditions are bad, even a small bank can be deemed systemic. Europe should not consider that just having a high capital requirement would allow cancellation of a large part of the supervisory framework for the small institutions.
It is true that Europe has to find solutions, but ‘the road to hell is paved with good intentions’, and they are shifting from one concept to another. Originally, proportionality meant that a rule does not overshoot its objectives. The additional concept, which was promoted until last year, was less administrative burden. The Commission have taken this onboard, and they may have a great deal to do, but they have no doubt that this should be done; i.e. reporting, disclosure, less granularity and so forth.
However, proportionality then became the idea of having more simplicity in the rules. Having less granular rules, with many provisions not applied to simpler and less risky banks, is possible, but is somewhat difficult. If the goal now is to recalibrate all the rules and have just one or two simple ratios, then the risk of fragmenting the market is very high. Europe has to be careful that it does not worsen its system, and divide its efforts.
6. Challenges posed by deviating from the idea of a single rulebook: an effective level playing field, preserved financial stability, the facility to identify the banks resorting from each framework, legibility for investors and retail depositors and the agility of the EU banking sector
6.1. The level playing field and the efficiency of bank regulation are at stake
A central banker noted that the ECB feels quite strongly that they should not deviate from the idea of a single rulebook, as they think the system should be based on a common and strong capital and liquidity, as well as governance rules for all of the institutions. There is value in a level playing field, and more importantly, the safety of these rules is needed. A small size does not mean a bank is not risky. There can be consequences in liquidation for unprotected depositors, for instance, and there are also wider consequences of small bank failures. It is also not easy to define what ‘small’ is, because it means something different in Germany compared to smaller countries. Additionally, in comparison, the US system is more intrusive than the European system, because every bank, regardless of size, is scrutinised every year.
All in all, in terms of how to progress, the ECB would advocate adhering to the single rulebook and taking the existing benefits of increased safety of the banks, which is the prerequisite for banks being able to lend to the economy, whilst working to simplify certain rules. However, additionally, supervisors should apply discretion and a risk based approach in their supervisory practice.
6.2. What restrictions on business models, size and risk taking would naturally follow from proportionality?
A regulator raised two questions; the first was what sorts of restrictions on business models, size and risk taking would naturally follow from proportionality, and would be acceptable. Clearly, a lighter regulatory touch should somehow be accompanied by a lower risk; not only lower risk in terms of the factors that are applied, but also lower risk in terms of the rules applied. One example is pass-through. There is regulation that ensures pass-through. A lighter touch is also possible in relation to NSFR and related topics. Yet, one significant issue, having experienced two banking crises, is that money market deposits, big deposits or time deposits are notoriously dangerous. The first question then is whether a criterion that falls into the category of a small bank with a lighter regulatory touch should be no time deposits or no money market deposits because they are so subject to a flight risk. Europe needs to look at what else should be included.
A central banker wanted to comment on the first question, which asked what kind of compensation there should be if the rules are simplified. Although ‘it may not be very fashionable’, it is possible to look to the United States of America, where the Financial CHOICE Act is under discussion at the present time, and this is moving in the direction of increasing capital and liquidity requirements. One of the first groups President Trump has received is the community banks, and the CHOICE Act would exempt small banks from a broad set of rules only if they hold more capital to fulfil a higher leverage ratio. This could be argued to be compensation, which might economists feel better about what is proposed.
An industry representative stated that small banks should not be engaged in deposit taking; at least not big deposits, or limited deposit taking. They should not engage in derivatives trading, and their markets department should probably be restricted. Small banks should be allowed to engage with derivatives for risk management purposes, but could be restricted to not doing this with customers. There could also be a provision relating to the bank’s local presence, regional presence, or national presence. In addition, this industry representative definitely supports in this context transparency; all rules should be disclosed, so that their customers face no surprises when something goes wrong.
6.3. Achieving an appropriate awareness of all the stake holders on the differences is an additional challenge
An industry representative agreed on the fact that Europe needs to consider what to do in relation to telling the other stakeholders, including creditors, about what the risks are if they do not impose these sorts of restrictions. Clearly, there is a huge difference between somebody who is subject to two times the capital requirements in terms of MREL and somebody who is not. Consideration needs to be given to whether there is an obligation to inform the general public that that risk is very different, and whether, if they did not, they are liable when that risk materialises. Additionally, there is a need to consider whether there is a completely different way of resolving these kinds of institutions, or whether that should be tied together with the requirements where there is a lighter regulatory tranche.
6.4. Should we enable both diversity and consolidation in the banking sector?
An official said that they want diversity in the banking sector and, in this respect, they fully agree that proportionality is an asset. It promotes diversity; it is therefore good for the long-term funding of Europe’s economy, and that is partly why the legislative package contains a number of proposals on proportionality. Proportionality can be good for competition if it is crafted well, but it can also be very bad for competition in the single market. That is why Europe needs to approach the issue with caution.
They also want consolidation, at least in some markets in Europe. Europe has too many banks and is over banked in some places and, in order to have a more efficient and more profitable banking sector, need consolidation to take place. Whether proportionality is an asset or a drawback for the future consolidation of the banking sector is a question that needs to be asked.
The small banking box, which would encompass banks that have been judged to not be risky, is an interesting proposal. However, it needs to be borne in mind that, while small banks may not be risk-takers in isolation, taken together they may be systemic if they act in the same fashion in the market in reaction to external events, or if they make the same mistakes in the management of their balance sheet. That is an issue that needs to be thought about, and therefore the small banking box is not an easy answer.
An industry representative said that if diversity in the European banking industry is supporting all the other aims that the Commission has set, they should defend and improve diversity by separating those banks, which do not contribute to the diversity from others. They should separate large and complex banks from small and simple, or less risky, banks; the latter do not pose any significant risks for the European financial system. They should be in the scope of a small and simple banking box, which goes far beyond the mere size-based differentiation.
They do not propose to skip all the capital requirements set by Basel II and Basel III, and the liquidity requirements. They are necessary as a foundation of a sound financial system. In this respect, they do not feel comfortable approximating some of the proposals of the Trump administration, although they agree that they would support the proposals because they have learned from the small banking box in the United States, which separates Main Street and Wall Street banks from each other.
Consolidation in Europe is not a goal in itself; it should contribute to a sound financial system. If one consolidates the 8,500 banks that exist in Europe or the 6,500 in the SSM, one will end up with an oligopolistic market that is detrimental to consumers. That is the other side of a fierce competition that lowers prices, not only according to economic theory but also in practice, as observed in Germany. The herd behaviour of financial institutions according to systemic impact would affect the financial system as a whole. In that situation, a lender of last resort is needed and nothing else; no supervisory or regulatory agency could stand such a challenge of the financial system.
Looking at what could happen within a small and simple banking box, Europe should not apply those rules that were designed for large and complex international banks; they should lower reporting and disclosure requirements. They do not see why those small institutions should be subject to recovery and resolution plans, and some governance proposals should not be applied there. This could provide a substantial relief from the fixed cost burden that regulation poses for small and simple banks.
7. The specificities of the US banking sector
A regulator said that while participants have referred to the US example because this is the most obvious, but it does not compare at all to what they would like in the EU, for three main reasons. The first thing is that the majority of banks that are discussed in this context are the community banks, which service the community. This is helpful, but in Europe, while a community can be served, tomorrow the bank can go beyond that and expand its business. This is the reason why Europe opted for a single rulebook at the beginning; it was a very important prize that they wanted to be embedded in the single directives and the regulation. To change this would constitute a major political choice for the Commission and the legislators.
The second difference is in terms of the rate of liquidations for those small banks. Liquidation is how the US solves problems with these small banks, but they do not think that Europe has the ‘social appetite’ to do this.
Lastly, the price of the service to the consumer is very high, and the service is not very good, at least with regards to the banking service. This constitutes a big difference to what has been achieved in Europe. Consequently, the US is not a benchmark: Europe may apply simplified legislation or more conservative legislation to a small number of banks, but apart from this, they have nothing to compare.