The German Banking Industry Committee says that the costs generated by implementing the regulatory requirements pose a significant challenge, especially for small banks. In deed, regulation should not aim at ever rising complexity and therefore burden, but at more simple and at the same time harder rules.
12 February 2016
In a response to a consultation by the European Commission, the German Banking Industry Committee (GBIC) criticises “unnecessary burdens” arising from new banking regulation. The costs generated by implementing the regulatory requirements pose a significant challenge, especially for small banks.
In deed: The mere amount of wording of laws and legal texts is frightening. For a single board member of a small or mid-sized bank it is simply impossible to work through ten thousands sides of rules and regulations. The internal costs for adherence in the processes and administrative functions of such a bank is huge. According to Prof. Schulte-Mattler from the University of Dortmund the core bank regulation alone contains 4001 provisions written on 34000 pages. It doesn´t wonder, therefore, that bank associations harshly criticise the excessive and complex regulatory framework strangling the sector. Re-regulation has become a strong call which is not only heard from bank representatives and associations.
It is questionable if the financial system becomes safer just by a vast and complex framework, comprising all the often unuseful and needless compromises at all the last detail levels as possible. Lost in complexitiy, technical claims and exception rules of powerful and numerous stakeholder groups as well as authorities, regulation has somewhat lost its direction and is drowned in an increasing flood of legislation. For a non-expert it is simply impossible to capture and evaluate on a basis of understanding.
What is needed is to clean-up regulation. All the legisation with delegated acts, technical standards, guidelines and so on has to be evaluated and reviewed with the aim of making it simpler, easier and more purpose-oriented. Less bureaucracy, more clarity and less complexity. We need a framework that can be handled and dealt with as well by small banks without big teams of regulatory experts. And it should follow much more the idea of proportionality and the riskiness of bank activities and business models, thereby re-enforcing competition principles.
But we do not need a pause or even deregulation which has caused the financial crisis. The financial sector today is more complex and interconnected as it has ever been, despite all regulation in the last years. We do not have financial stability, although it might be seeming better now. The too big to fail problem is not solved, even with the Banking Union and the Single Resolution Mechanism in force.
Achieving a resilient and diverse financial sector requires – and with respect to traditional small and mid-sized banks deserves – a more simple but harder regulatory framework, facing and settling the core and baseline of the problems and risks in the financial sector. Supervision has to be focused and concentrated on areas and levels from where the biggest risks for financial stabiliy can arise. That is essential and should be also in the interest of the financial sector as a whole. It would benefit financial institutions which do their job well.