Yannis Stournaras: Proportionality in European banking regulation
Keynote remarks by Mr Yannis Stournaras, Governor of the Bank of Greece, at the Conference
on "Proportionality in European Banking Regulation", organised by the Bank of Greece and the
University of Piraeus, Athens, 13 February 2017.
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Ladies and gentlemen,
It is with pleasure that I welcome you to this conference on the principle of proportionality and its
relevance for banking regulation, supervision and resolution.
Of course, proportionality is a well-established general principle of European law. As a standard
of public law, it has a long pedigree in both national and European law. And in more philosophical
debates, it has always served as a point of reference for theories of justice. Indeed, the original
formulations relating to proportional justice can be found in the writings of Plato and Aristotle.
This arguably makes Athens an apt location for carrying on the debate in a contemporary
context.
But why should proportionality be discussed in specific relation to banking regulation? And why
has this particular debate only recently flared up?
The answer lies in the wide concept of proportionality, which informs the banking debate. The
demand for proportional banking regulation goes beyond the technical legal use of proportionality
as a standard of judicial review!
Regarding the narrower legal use of the concept, it is quite clear that lack of proportionality can
be invoked as a ground for impugning particular legislative or administrative measures of the
European Union, or national measures of the Member States which implement European law.
However, the intensity of judicial review on this basis will typically be low, since for measures
which entail policy decisions or involve complex assessments of the technical and economic
situation, the courts will recognize a wide margin of appreciation to the legislative or
administrative authorities and only overturn a measure if they consider that this is 'manifestly
inappropriate'. Now, the elaboration of prudential standards in the banking field is likely to entail
precisely such complex technical evaluations on the part of the Union's legislative and regulatory
decision-makers; the same applies to a very large extent to the making of individual supervisory
decisions. For this reason, the actual decisions of banking regulators are likely to be overturned
by the courts only in rare and exceptional circumstances. And rightly so! A cautious and rather
sparing judicial interference in the practical working of the banking regulatory and supervisory
system, is fully justified by the comparative advantages of administrative, as opposed to judicial,
decision-making in this field.
However, there is another, wider concept of proportionality that we should consider: that is,
proportionality in the sense, not merely of a technical standard of administrative law, but of a
broad constitutional ideal, which should guide all official actions in the Union.
This wider notion, which is more congenial to the thinking of economists like me, is explicitly
entrenched in the text of the Treaty on European Union. Indeed, article 5 of the Treaty states
clearly that "[t]he use of Union competences is governed by the principles of subsidiarity and
proportionality". The same provision further clarifies that, "[u]nder the principle of proportionality,
the content and form of Union action shall not exceed what is necessary to achieve the
objectives of the Treaties." The provision was inserted in the Treaty primarily with the intention to
regulate the Union's legislative and general policy-making measures, rather than the
administrative decisions, through which the European rules, standards or policies are applied to
individual cases at the supranational and national levels.
This wider concept of proportionality as a regulative principle of European standard-setting,
requires careful and responsive policy- and rule-making. More to the point, it requires the
selection of the least burdensome or restrictive approach in order to achieve our regulatory
objectives. This can only be achieved through a careful balancing of interests -the promotion of
public objectives versus the rights and legitimate interests of private individuals and enterprises;
the exercise of European competencies versus the preservation of the policy autonomy of the
Member States- and the weighting of the potential costs against the benefits of particular policies
and tools. To put it differently, proportionality requires properly calibrated European responses to
well-identified problems and is inimical to heavy-handed, blanket, one-size-fit-all approaches to
legislation and regulation. In this demanding but valuable sense, proportionality is closely linked to
notions of equality and equity, also including the notion of proportional equality, which requires us
to treat similar cases in the same manner, but to differentiate between dissimilar ones. It is also
linked to the need for respect for fundamental rights and Treaty freedoms, including the right to
property and the freedom of economic activity.
Proportionality, then, stands here as a short form for a constellation of closely related principles
and values, which, we, as regulators and supervisors, have a duty to serve: equality, legal
certainty, individual rights, and good administration. This concept of proportionality has recently
become a major theme in pan-European discussions of banking regulation - and for good
reason. It subsumes more specific discussions on better regulation, simplification and the need
for differentiation. And it provides a framework for the evaluation of existing rules and practices,
and a compass for their elaboration and improvement.
Why has this debate gained traction now, and not in the past? I believe that three specific
aspects of the post-crisis regulatory architecture explain, and also justify, the emergence of
proportionality as a core concern in European banking regulation.
These three aspects of the post-crisis European regulatory architecture have greatly increased
the significance of the matter:
First, the shift from the old approach to prudential standard-setting for credit institutions,
which was based on no more than a minimum harmonization at the European level, to a
new system of almost full Europeanization of the applicable norms. The intensive legislative
activity which followed the Global Financial Crisis, culminating in the enactment of the
Capital Requirements Directive IV and the Capital Requirements Regulation, has resulted in
much greater uniformity, verging to full harmonization, of the regulatory norms. The new
state of things is epitomized in the construction of a Single Rulebook of pan-European
applicability, with the EBA acting as the Rulebook's custodian and key developer.
Second, the considerable expansion of the prudential regime to cover new aspects of a
bank's organization and business activity. This thematic extension is evident both in the
Basel regime, which, beyond the usual capital adequacy requirements, now encompasses
global standards for liquidity and leverage, as well as in the host of European legislative
initiatives of recent years. As a result, the net of supervisory controls over the activities of
credit institutions and other financial intermediaries has become much denser than what it
used to be. This makes the question of proportionality of the regulatory requirements all the
more pressing.
Third, the move from a system of national responsibility for supervision to the streamlined,
and largely centralized, new supervisory architecture of the Banking Union.
Under the pre-existing system, the European norms, such as they were, could be individuated
and amplified at the national level, thus leaving the question of diversification and proportional
implementation largely within the responsibility and discretion of national legislatures and
competent authorities. In contrast, in the new environment of maximum harmonization,
comprehensive prudential controls and centralized supervision, these concerns need to be
addressed primarily at the European level.
For this reason, the proportionality of the Single Rulebook's primary directives and regulations
and numerous delegated and implementing acts, has rapidly emerged as a key concern of the
banking industry. In this context, a number of specific issues have come to the forefront over the
past two years, concerning, for instance, the implementation of Basel III in Europe, the detail and
frequency of the new reporting requirements, the timeframe and pace of the transition to the
fullyfledged regime, the treatment of small banks with simple business models, the treatment of
cooperative banks, and so on. It is a sign of the responsiveness of the new European regulatory
structures that these concerns have gained the full attention of the EBA, which has examined the
issue in two special supervisors' workshops and a significant report of the Banking Stakeholder
Group. The influence of the debate is also evident in the EBA's consultation papers and RTSs.
Ladies and gentlemen,
In its dual capacity as central bank and national competent authority, the Bank of Greece is
naturally fully cognizant of the financial industry's strong and persistent demand for less
burdensome, more proportionate and more fit-for-purpose, prudential requirements. And we
recognize the justice of certain arguments concerning the difficulties and heavy costs of
compliance with the new regime, especially for smaller institutions, characterised by simple
business models, modest scale of business and non-complex systems and controls.
Of course, our primary consideration is the safety and soundness of the banking system, both
domestically and at the European level. The Bank of Greece is strongly committed to robust and
effective prudential standards, which can deliver systemic safety, market discipline and proper
incentives for banks' internal decision-makers. For this purpose, it has been fully supportive of
the post-crisis efforts to reregulate the banking sector and has sought unflinching commitment to
the faithful and complete national implementation of the new standards, despite the acute
difficulties presented by our country's economic predicament and the need to support and repair
the banking system, which has been gravely affected by the crisis.
But at the same time we share with the banking industry the concern for proportionality. We
consider excessive complexity to be part of the problem, not of the solution, in so far as it
increases costs and uncertainty for the regulated institutions, without thereby generating
additional benefits in terms of systemic or individual safety. We support regulatory approaches
that allow for differentiation where appropriate, and apply criteria of materiality in order to
determine the applicability or otherwise of particular rules to different classes of institutions. And
we recognize the need for consistency across the various components of the prudential,
resolution planning and reporting regimes, to avoid conflicts and duplication.
More generally, we have all along expressed scepticism with regard the one-size-fits-all
approach to regulation - an approach whereby uniform prudential standards are set at the same
level for all credit institutions, as well as for other financial institutions such as investment firms.
In particular, we have been sceptical of a uniform model-based approach to financial risk, based
on the generic risks faced by a notional universal banking group, of unspecified (but probably
large) size, carrying on mixed activities, including extensive securities and derivatives exposures,
and displaying a relatively high degree of interconnectedness with other participants in financial
markets.
In all these respects, we consider that proportionality can enhance the effectiveness and
efficiency of the prudential regime. We do not see it as a step back from the post-crisis
commitment to high standards of prudence, or relaxation of the new regime. This is not a
question of trade-offs between safety and market-friendliness, but a matter of optimal institutional
design for safety and soundness.
Last but not least, we consider that the further development of the prudential regime should take
into consideration the implications of regulatory requirements -including the phasing in of their
implementation- for the real economy. Especially in the euro area, with its largely bank-based
financial system, the ability of credit institutions to extend credit is critical for the vigorous
performance and growth of the real economy. The need to sustain bank financing to the real
economy acquires added importance in the present environment, when the European recovery is
still fragile and the banking systems of several Member States are still struggling with the legacy
of the crisis.
Moreover, even the capital market depends on the profitability and competitiveness of the banking
sector for its smooth operation and deepening, because banks are involved as both service
providers and users at various stages of the securities and derivative intermediation chain. In this
sense, the Capital Markets Union should be seen, not as an alternative, but as a complement, to
a well-functioning Banking Union.
Ladies and gentlemen,
This conference was conceived from the very start as a forum for discussing in depth these
issues. As things have turned out, the discussion now takes place in the context of the European
Commission's banking reform package, which was made public on November 23. This includes
proposals for the revision of the main (Level 1) instruments of the Union's Single Rulebook, that
is, the Capital Requirements Directive IV, the Capital Requirements Regulation and, in so far as
the resolution regime and, especially, the resolvability and loss-absorbing capacity of credit
institutions is concerned, the Bank Recovery and Resolution Directive and the SRB Regulation.
The Commission's package enhances and brings up-to-date the post-crisis prudential regime by
transposing into European law those elements of the global Basel III standards which have been
fully specified after the enactment of the Capital Requirements Regulation in 2013. It thus
includes substantial new rules on a binding 3% leverage ratio, detailed provisions on credit
institutions' liquidity requirements, and provisions, requiring institutions that trade in securities in
derivatives to maintain more risk-sensitive own funds. Moreover, it implements the Financial
Stability Board's new Total Loss-Absorbing Capacity (TLAC) standard for the 30 global
systemically important institutions, almost half of which are European.
In a very promising development, the Commission used this opportunity in order to introduce
significant elements of proportionality in the Single Rulebook. Based on extensive public
consultation and impact assessments relating to the CRD/CRR regime, it has included in its
package a set of important proposals that are explicitly intended to make the prudential regime
more proportionate and to reduce the burden faced by smaller and less complex credit
institutions. The proposed amendments affect, in particular, the disclosure, reporting and
tradingbook-related capital requirements. Furthermore, they differentiate the treatment of certain
financial instruments, such as covered bonds, high quality securitization instruments, sovereign
debt instruments and derivatives used for hedging, with a view to reducing the costs of issuing or
holding such instruments, thus enabling the continuing participation of banks in the relevant
securities markets. In this manner, the regulatory regime is differentiated to facilitate the
deepening of European capital markets and the creation of the Capital Markets Union.
One could argue that the inclusion of strong elements of proportionality in the banking reform
package marks a move away for the traditional tendency of European law to regulate financial
institutions through uniformly applicable rules, in the name of competitive equality. The
Commission explicitly and forcefully asserts the relevance and significance of proportionality as a
regulative consideration that informs its proposals. This is most welcome, and we should all
work to bring the review of the Single Rulebook to rapid and successful conclusion.
This, of course, will not exhaust the quest for more sophisticated, proportionate and cost-efficient
regulatory solutions. Our regulatory job is to pursue simultaneously a variety of objectives -
systemic stability and bank-level safety, equivalent and consistent treatment of the credit
institutions and other regulated persons, appropriate differentiation and diversification of the
regulatory and supervisory regime, and a financial environment conducive to economic growth.
This is a demanding task - in fact, a permanent task, requiring continuous effort and adaptation.
In all cases, it must be pursued under the light of the principle of proportionality, which should be
incorporated into our forward-looking thinking and turned into a necessary consideration
informing the design of all regulatory norms and policies in the future.