Stability, Flexibility and Proportionality: Towards a Two-Tiered European Banking Law?

Abstract

The banking regulatory framework adopted by the European Union is both stern and unidimensional. Proportionality in banking regulation and supervision is mainly a theoretical reference, with little or no practical implementation. On the face of it, the fundamental choice to apply the Basel standards to every European bank, no matter the size, systemic relevance or complexity, would seem to provide certainty and hence stability for the benefit of the whole banking sector. However, the “one size fits all” approach hinders the development of smaller banks by creating competitive distortion. This papers purports to provide ideas that will relax the system and, based on an ad hoc, bespoke assessment, will provide for flexibility and proportionality for a key part of the banking sector, while maintaining stability. The paper contains a proposal for criteria to make a proper distinction between “small” (tier 2) and “large” (tier 1) banks in this context. It also provides the contours of the manner in which the rules applying to the tier 2 banks should be determined.

Keywords: Banking supervision, Single Rule Book, Capital Requirements, Liquidity Requirements, Basel Committee Standards, Proportionality, Financial Stability, Capital Requirements Regulation