andreas dombret : sometimes small is beautiful, and less is more – a small banking box in eu banking regulation speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at a lunch debate on proportionality in banking regulation at the representation of the state of hesse to the european union, brussels, 19 october 2017. * * * 1. introduction : striking the right balance ladies and gentlemen at the end of the day, regulation is always about striking the right balance. regulators are always torn between “ the stronger, the better ” and “ sometimes less is more ”. we need to strike the right balance – to find a middle ground – between too weak and too constraining regulation. today, i want to focus on a very important – but frequently neglected – aspect of our balancing act : that between setting robust standards for global banks, on the one hand, and allowing different business models of the many small and medium - sized banks in europe to co - exist, on the other. we are not quite there yet. the core problem is that our regulatory architecture still lacks sufficient proportionality – in non - technical terms : the rules are too complex for small, locally oriented banks. today i want to explain why this is the case – and why europe ’ s decision makers should care. i will begin by outlining how the current regulatory regime of complex rules that governs virtually all banks in the eu came into being. then, i will devote most of the rest of my speech to laying out a solution for the eu ’ s banking sector : the small banking box – a separate set of rules for smaller, locally oriented, and less risky institutions. 2. international, complex rules for small, local banks but let me first outline the challenge at hand : all banks in the eu are subject to a single set of strong, but also complex and detailed, rules. these rules are derived from an international standard developed in a global forum. why is this a problem? international standards for the banking business are very important. in fact, they are a key element of global financial stability. that ’ s why the basel committee, a global forum of regulatory authorities from the g20 nations, develops these standards. but we need to keep in mind that these rules were originally designed to level the playing field for internationally active banks across the globe. and to prevent a regulatory race to the bottom among jurisdictions. naturally, they have therefore been fitted to the organisational structures,

these challenges consist of. 2. low interest rates mean additional provisioning let ’ s start with the first major challenge – the low - interest - rate environment. this is felt to be a burden among credit institutions and savers alike. and the pressure is mounting by the day. the 1 / 6 bis central bankers'speeches public debate surrounding this topic can be broadly summarised as follows : while banks ’ earnings shrivel, savers have no choice but to accept practically no interest on their savings. this view is certainly not entirely off the mark, and i think that we need to take the debate and the widely - held concerns it articulates very seriously. but in some respects, this viewpoint is overblown and not always completely accurate. let us therefore delve deeper into the issue. shrinking earnings from interest business are a fundamental problem for banks and savings banks. in prolonged periods of low interest rates, maturing loans with high rates of interest are replaced with new, lower - yielding loans. to counteract a decline in interest income, banks tend to increase the average maturity of the loans they issue. but this only goes so far to remedy the malaise in the current environment because longer - term interest rates are very low, too. so to continue earning money from interest business, banks need to cut back on their interest expenditure. until now, however, the de facto deposit rate floor for retail investors has been 0 %. this is making classic deposit business increasingly unattractive for many banks and savings banks, and for many of them it would be cheaper to raise funding in the money and capital markets. in a recently published discussion paper, we examined the impact of a prolonged period of low interest rates on german credit institutions ’ interest business. our analysis indicates that, if interest rates remain constant for the next four years, net interest income will fall by a total of 16 % 2 - a huge cut given the key importance of interest business. you might therefore be forgiven for thinking that nothing could be better for institutions right now than a rapid return to higher interest rates. and even though that ’ s probably right in the long term, rising interest rates create significant risks in the short and medium term. what happens if interest rates climb sharply within a short space of time? persistently low interest rates have driven up what is known as maturity transformation business at german banks and savings banks. the narrow spread between short and long - term interest rates means that institutions are now seeing stronger inflows