the business models, of such large international banks. since the adoption of the international basel ii framework in 2005, the complexity of these rules has mushroomed. the basel iii reforms launched in response to the last financial crisis – including the final elements of the basel iii package that we are currently negotiating in basel – have made the rules even more detailed and complicated. we have the guiding principle of the reforms to thank for this : risk - oriented governance and 1 / 4 bis central bankers'speeches regulation are there to help banks allocate capital resources as efficiently as possible. but in order to prevent undercapitalisation, this approach needs very specific rules. this increases the compliance workload – that is, the effort associated with meeting the requirements as well as demonstrating that they ’ ve been met. the basel rules were made for large, internationally active banks – they were not designed with small banks in mind. yet, in europe, we adopted these rules for all european credit institutions alike – including the thousands of small and medium - sized banks with simple business models and regional focus. the motivation for this one - size - fits - all - regulation was to have a single set of rules for the single market. the eu ’ s primary goal of a common, single market meant that one single set of rules was preferred over differentiated sets of rules. proportionality – the principle that rules must be proportionate to the issue they address – played only a secondary role. while this makes good political sense, it has had serious side effects – as it favours large, internationally active banks over smaller institutions. particularly for credit institutions that are able to strongly optimise their employment of capital in order to benefit from higher returns, this is worth all the effort. and it ’ s worth it for especially large credit institutions because they can profit from economies of scale where fixed costs per product fall as the volume of business increases. this then also makes it easier to finance a larger compliance department. smaller, regionally based institutions, however, cannot normally rely on these economies of scale or a strong risk appetite as a source of income. seen from a single - entity perspective, the cost of regulation is similar or even higher for these banks, but their ability to take advantage of these complex strategies is somewhat weaker. in other words, the complicated risk - oriented approach favours banks with a large organisation, whose activities are more complex and which take on greater risks. the reason we should be giving this more thought is that the vast majority

walk you through the approach. 4. the “ who ” first, let me address the “ who? ", namely the intended addressees of the relief measures. the proposal follows a three - tier approach. at the very top are the systemically important and potentially systemically risky institutions – the smallest group in terms of numbers but extremely important in terms of risk. nothing will change for these institutions. they remain subject to the full basel iii requirements, additional capital buffers, total loss absorbing capacity, and so on. the second group includes institutions which are neither large and systemically important nor small and low - risk, which is why it is not possible to make extensive simplifications for them. nonetheless, some targeted relief measures should be taken by making specific amendments to the current regulations. finally, the third group is made up of small and non - complex institutions – the banks that are most affected by the fixed costs of regulation. this group – the largest in number – would see its cost burden alleviated radically by means of a separate regulatory device : the small banking box. the burning question now, of course, is which institutions belong in which group – and particularly, which banks could be included in the small banking box. these classifications have to be balanced carefully, and this should be part of a european - level discussion. importantly, size wouldn ’ t be the only criterion. i ’ ve already said that not only do institutions in the small banking box have to be relatively small, they also must not be too complex. this is why we will need additional criteria that prevent institutions with riskier business models from being part of the simplified regime. experience has taught us, however, that there will almost never be a perfect list of criteria that covers every eventuality. this is why the final decision should always rest with supervisors. should they have serious misgivings, they can opt not to subject an institution to the simplified rules. they can also take into account the systemic risks arising from the connectedness of several small institutions – that is to say, small banks which are “ too many to fail ”. this set of options should not be a one - way street. i believe that institutions that would be considered eligible for the small banking box should also nevertheless have the option of being supervised under the more complex rules. 3 / 4 bis central bankers'speeches 5. the “ what ” that leaves the second key question : what exactly might the box look like? here we must aim right at