The conference on 24 January 2019 in Bonn on proportionality in banking, organised jointly by BaFin and the European Banking Institute (EBI), began with a bold statement. "The banks are being battered by a tsunami of regulatory requirements," said Prof. Matthias Lehmann of the University of Bonn in his welcoming address. Lehmann is on the Academic Board of the EBI, which regards itself as the think tank of the most important European universities. In his view, excessive regulation put a strain on small banks, encouraged mergers within the sector and led to fewer and fewer credit institutions. It was imperative that we consider which regulations are actually suitable, necessary and appropriate, and what level sets the law. Lehmann thus raised the titular principles of proportionality and subsidiarity right at the beginning of the day.

"We are all sitting in the same boat and also have to try to paddle together," commented Thomas Happel, Director-General of BaFin's Supervision of Bausparkassen, Private Banks and Leasing directorate, taking up Lehmann's point. "When we talk to representatives of banks, savings banks and banking associations, we seldom hear praise, but rather criticism and complaints," added Happel, who was representing BaFin's Chief Executive Director, Raimund Röseler.

Different ideas on what proportionality means

The misunderstanding starts with the language. "Unfortunately not everyone understands proportionality in the same way," said Happel. Some wanted to get rid of rules without replacing them, and in return simply increase the capital requirements – along the lines of "raise leverage ratio, ditch the rest". There were also calls for proportionality that actually meant deregulation. "No one can call for reasonable regulation as a way of disguising that their actual goal is deregulation." Both the economy and society had paid dearly for deregulation last time: the cost had been the financial crisis.

BaFin supports the approach of "simpler yet risk-sensitive regulation“. Admittedly, this had not been implemented consistently enough everywhere.
The conference program provided the 170 participants with numerous other presentations and interesting discussion between academics, the industry and supervisors. Senior BaFin employees spoke about their supervisory priorities, particularly in part 3 of the conference, "Supervision".

Single Rulebook

Two academics presented on the legal foundations: Prof. Elke Gurlit from the University of Mainz delved deep into proportionality principle theory, but in doing so did not lose sight of the practical aspects. "The Single Rulebook is not an end in itself, but serves to prevent regulatory arbitrage and guarantee a level playing field," was one of her key comments. She also noted in relation to the banking package (see BaFinJournal December 2018) that "...it substantially simplified things for smaller and non-complex institutions and realises numerous elements that could be the subject of a small banking box."

Borrowing from Catholic social doctrine

Prof. Christoph Ohler from the University of Jena explained to participants that the subsidiarity principle originated in Catholic social doctrine, with the essence being that higher levels of authority should allow subordinate levels to work independently for as long as possible, and only get involved if the lower level was unable to do things better. Matters were sometimes different in real life. One of his conclusions was therefore: "Judicial review respects the discretionary prerogative of the Union legislator, which applies the subsidiarity principle generously for the benefit of the Union."¹

In the second part of the conference ("Regulation") Birgit Höpfner, Deputy Director-General of BaFin’s Banking Risks – Policy Issues directorate, demonstrated that in 1995 a banking regulator made do with just five sets of rules, but these days many were needed. This caused amusement; many participants pulled out their smartphones and took pictures of the relevant PowerPoint slide. Since the enactment of the German Banking Act (Kreditwesengesetz – KWG), banking supervision law had undergone drastic change, starting with purely national legislation, then shifting to the national implementation of EU Directives, and then to a legal framework shaped by EU Regulations, in which, increasingly, national law serves a supplementary function only. "EU law takes precedence over national laws and permanently restricts national decision- and policy-making discretion," explained Höpfner.

She argued against deregulation, but suggested measures such as an end-to-end review and the "decluttering" of the existing legislative framework in order to remove provisions that were unnecessary or no longer necessary in their current form. New regulatory approaches could also be considered which, for example, differentiated between different categories of institutions.

The perspective of the banking associations

In his stocktake of proportional regulation, Dr. Holger Mielk from the National Association of German Cooperative Banks (Bundesverband der Volksbanken und Raiffeisenbanken – BVR) emphasised that the equal treatment of all institutions without taking size and risk into account conflicted with the principle of treating unequals unequally. This was unacceptable.

As an example of a regulatory approach that avoided these consequences, he referred to the Basel II model and the options it provides with regard to credit risk and operating risk. "If I as an institution can choose between various regulatory approaches for a category of risk, there can be no allegations of unequal competition," said Mielk. He criticised the fact that the Single Rulebook allowed flexibility in theory, but in reality almost always ended up as a one-size-fits-all approach.

Michael Engelhard, Head of Banking Supervision/Policy at the German Savings bank and Giro Association, looked beyond EU borders to Switzerland in his presentation. A small bank regime was being tested there for institutions "with significantly above-average capital and liquidity and no other particularly heightened risks". The scope of the requirements for such institutions could be substantially reduced, without lessening the level of protection overall. This approach to proportionality was also worth thinking about in the EU.

Complexity versus simplification

Dirk Jäger, Director of the Association of German Banks (Bundesverband deutscher Banken), expressed the view that the current architecture of the supervisory regime promoted complexity. The EU Commission, the European Banking Authority (EBA), the European Central Bank, the Deutsche Bundesbank and BaFin were all by nature different institutions with partially overlapping powers. Jäger asked the audience why it is that existing provisions are not repealed when new provisions that are substantively very similar are introduced. As an example he mentioned FINREP (financial reporting) according to IFRS 9 compared to the traditional approach under the German Commercial Code (Handelsgesetzbuch - HGB) (see BaFinJournal December 2017). Jäger did, however, also offer solutions, such as better consultation between the rule setters, timely impact assessments or reasonable transitional periods.

Following that, Björn Grommek, chairman of the management board of Stadtsparkasse Grebenstein, presented figures and practical examples to demonstrate what in his opinion amounted to disproportionate regulation: Since the financial crisis, there have been 50 new laws and regulations encompassing around 34,000 pages. He doubted the usefulness of FINREP for smaller institutions that reported in accordance with the HGB, the management report ("excessive"), the disclosure report ("never read") and customer advice ("introductory law course") in their current forms. The same was true for small institutions subject to collective bargaining agreements, also in light of the German Remuneration Regulation for Institutions (Institutsvergütungsverordnung - InstitutsVergV) (see BaFinJournal April 2017).

The discussion moderated by Lehmann between Prof. Uwe H.Schneider (University of Mainz), Dr. Dirk Bliesener (Hengeler Müller), Andreas Knief (Volksbank Haselünne eG), Wolf Ulrich Martin (Bankhaus Gebr. Martin AG), Rainer Behle (BaFin) and Mr. Grommek also concerned simplified procedures for small institutions. In spite of all of the differences it became clear how strongly ideas such as a small banking box or a regulatory “sandbox” were influencing the sector.

The perspective of the Bundesbank and BaFin

The supervisors had the floor for the last part of the conference – first BaFin, then the Deutsche Bundesbank. Thomas Happel firstly reminded everyone that the supervisory authority enforced applicable law. However, in its executive capacity it also had the power to address pointless rules at the appropriate time and to act proportionately – in its supervisory capacity. "Unfortunately BaFin's discretion is becoming narrower and narrower," said Happel. In practice, the law often affords less discretion in the case of capital add-ons than for personnel-related measures.

To conclude the conference, Dr. Thomas Kick from the Deutsche Bundesbank described the stress test procedure for German less significant institutions (LSIs) in 2017. In the lead-up, the LSI stress test had been deliberately designed so as to keep the cost to the approximately 1,500 affected institutions within limits. An expert committee headed by BaFin and the Bundesbank with representatives from banks, banking associations and data centres held intensive discussions on the design and practicability of the test. "BaFin and the Bundesbank did not use a sledgehammer to crack a nut in the 2017 LSI stress test and will not do so for future stress tests either," promised Kick.

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