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EBA Proportionality Workshop Summary (03/07/2015)

Core Content

The European Banking Authority (EBA) hosted its second proportionality workshop in London on 3rd July 2015, with a focus on how proportionality can be effectively embedded in the European Single Rulebook. The workshop aimed to explore the practical application of proportionality across various regulatory deliverables, ensuring that regulatory requirements are appropriate for the size, complexity, and systemic relevance of institutions.

Main Views and Key Information

1. Purpose of Proportionality

• The EBA emphasizes that proportionality is not a "one-size-fits-all" approach, but rather a mechanism to ensure that regulatory requirements are commensurate with the risks and business models of institutions.
• The core idea is "same rule for the same risk" and "stricter requirements in presence of higher risks to stability".
• Proportionality aims to reduce unnecessary regulatory burden on smaller institutions while maintaining high prudential standards for systemically important ones.

2. Examples of Proportionality in Regulatory Standards

• Regulatory Technical Standards (RTS) on Prudent Valuation:
  • Introduces a "Core Approach" for calculating Additional Valuation Adjustments (AVAs), which is more complex and resource-intensive.
  • Provides a "Simplified Approach" for institutions with total fair-valued assets and liabilities below EUR 15 billion, allowing them to use a flat 0.1% of the aggregate value as total AVA.
• RTS on Countercyclical Capital Buffer:
  • Allows smaller institutions with limited foreign and trading activity to allocate exposures based on their headquarters location.
  • Provides flexibility for securitisation exposures when underlying information is not easily obtainable.
• RTS on Asset Encumbrance:
  • Reduces reporting burden for smaller institutions with minimal asset encumbrance.
• Technical Standards on Own Funds:
  • Differentiates requirements based on business models, particularly for cooperative banks.
  • Introduces specific rules for preferential and multiple distributions, with exceptions for non-joint stock companies.

3. Application in Risk Assessment and Stress Testing

• The EBA's Risk Assessment Report highlights a trend of "back to the basics" in banking, with increased lending to households and SMEs and reduced exposure to trading, derivatives, and sovereigns.
• Stress testing incorporates proportionality by offering simplified approaches for banks where trading is not a significant business component.
• Credit risk calculations consider the complexity of a bank's business model.

4. Proportionality in Resolution Framework

• The EBA discusses the Minimum Requirement for Eligible Liabilities (MREL) under the Bank Recovery and Resolution Directive (BRRD).
• MREL is more stringent for systemically important institutions (SIs) due to their higher risk to the financial system.
• Smaller institutions may not need to maintain full business continuity post-resolution, and MREL can be lower or even non-applicable if resolution can be achieved through normal insolvency procedures.
• The EBA is working on criteria for adjusting MREL when the Deposit Guarantee Scheme (DGS) can contribute to resolution costs.

5. Legislative Constraints and Evidence-Based Approach

• The EBA is not free to define proportionality at will; it must adhere to legislative mandates from co-legislators.
• Where differential application is possible, the EBA must base its decisions on sound evidence and thorough cost-benefit analysis.
• The EBA has advocated for proportionality in certain areas, such as remuneration principles, and is considering exemptions for institutions not reliant on variable remuneration or for staff with minimal variable pay.

6. Importance of Stakeholder Dialogue

• The EBA encourages stakeholders to engage in the consultation process and provide evidence for potential differentiations in regulatory approaches.
• Impact assessments are a key part of the EBA's work, helping to determine how regulations affect various business models.
• The EBA is currently conducting impact assessments on the Net Stable Funding Ratio (NSFR) and the Leverage Ratio.

Conclusion

The workshop highlighted the EBA's ongoing commitment to proportionality in the regulatory framework of the European banking sector. It underscored the importance of balancing regulatory rigor with practicality, especially for smaller and less complex institutions. The EBA remains open to feedback, dialogue, and evidence-based improvements to ensure that the Single Rulebook is both effective and proportionate.