Small banks play a vital role in providing credit and expanding financial inclusion. While these banks taken individually are not systemic, they must contend with an increasingly complex and costly regulatory environment primarily aimed at strengthening the oversight of systemic banks. How can small banks deal with these challenges, and how can a more proportionate approach to regulation of small banks be applied to align more closely with their size and business models?
Small banks play a vital role in providing credit and expanding financial inclusion. While these banks taken individually are not systemic, they must contend with an increasingly complex and costly regulatory environment primarily aimed at strengthening the oversight of systemic banks. Panelists discussed how small banks can deal with these challenges, and how a more proportionate approach to regulation of small banks can be applied to align more closely with their size and business models.
Key Points:
· Proportionality. The regulatory response to the global financial crisis has resulted in a more robust but also more complex regulatory framework. Standards developed for large, internationally active banks have become the de facto, imposing a burden on small banks that cannot easily afford the costs of compliance (Coen). This suggests a need for "proportionality,” with regulatory requirements tailored to smaller, less complex banks, either by introducing exceptions or adjustments to rules to allow for discretion by regulators, or by creating separate rules for smaller institutions that have lower risk profiles (Lautenschläger). Higher capital requirements in exchange for simplified regulation—a “simplicity surcharge”—is an option (Lautenschläger, Roldán). In the U.S., the Fed has proposed exempting community banks from two sets of Dodd‑Frank Act regulations, the Volcker rule and incentive compensation limits. (Gibson).
· Complexity. While size matters, complexity matters more—small banks can have complex operations with the potential for systemic risk as a group, particularly if governance is weak (Roldán). To be effective, regulation should be aligned with the risk posed by both the size and complexity of an institution (Espenilla). In Japan, the government uses a “judgement‑based supervisory approach” to differentiate among banks (Himono). Financial institutions with the greatest potential to cause risk to consumers, market integrity or competition are more heavily supervised.
· Digital technology. Community banks have the advantage of closer ties to their customers, but are increasingly seeking to gain a competitive advantage by using fintech. However, data security remains a challenge, and there are concerns about regulatory compliance, depending on a bank’s business model (Espenilla, Gibson, Himono).
Quotes:
“Proportionality in supervision does not mean application of lower prudential standards.” Nestor Espenilla
“The Basel Committee has a conundrum. We say very clearly the framework is intended for large, internationally active banks, but over time the framework has become the de facto standard.” Michael Gibson
“The rules shouldn’t be less stringent, they should be simpler.” Sabine Lautenschläger
“In Japan, we are trying to transform our approach from a risk‑based, enforcement‑oriented one to more judgement‑based supervision to be able to reflect the difference among banks.” Ryozo Himono
“We need to go beyond natural tailoring and actively look for ways to simplify the regulatory and supervisory structure for small community banks.” Michael Gibson
“Size matters but complexity matters far more than size. You can be a small bank with a very complex business model.” Jose Maria Roldán
David Lipton
First Deputy Managing Director
IMF
Mr. David Lipton has been First Deputy Managing Director of the International Monetary Fund in 2011. Before coming to the Fund, he was Special Assistant to the President and Senior Director for International Economic Affairs at the White House. Previously, he served as Under Secretary for International Affairs at the U.S. Treasury.
William Coen
Secretary General
The Basel Committee on Banking Supervision
As Secretary General, Mr. Coen directs the work of the Basel Committee on Banking Supervision, manages its Secretariat, and chairs the Basel Committee’s Policy Development Group and Coherence and Calibration Task Force. He chaired the Committee’s Corporate Governance Task Force and is a member of the IFRS Advisory Council. Bill previously served as Deputy Secretary General. His responsibilities focused on the Committee’s response to the global financial crisis, including the coordination of Basel III initiatives.
Bill joined the Secretariat in 1999 and had previously worked for the Board of Governors of the Federal Reserve System and the U.S. Office of the Comptroller of the Currency.
Nestor Espenilla Jr.
Governor
Central Bank of the Philippines
Governor Nestor Espenilla, Jr. previously headed the Supervision and Examinationsector, which oversees the supervision of banks and other nonbank financialinstitutions under the jurisdiction of the Bangko Sentral ng Pilipinas (BSP). Mr.Espenilla, Jr. has been with BSP since 1981 working in Economic Research,International Operations, and in the Office of the Governor. He was seconded to theIMF in 1990–1992.
Governor Espenilla, Jr. earned a BS in business economics and an MBA from theUniversity of the Philippines, and an MS in policy science from the Graduate Institute of Policy Science (GRIPS) in Tokyo, Japan.
Michael Gibson
Director of the Division of Banking Supervision and Regulation
Federal Reserve Board
Michael Gibson is the Director of the Division of Banking Supervision and Regulation at the Federal Reserve Board since 2012. He represents the Federal Reserve on the BCBS and works closely with officials from other U.S. and international government agencies on bank oversight issues. He formerly served as deputy director in the Board’s Division of Research and Statistics, where he was responsible for overseeing the division’s financial functions. He has worked on research and policy issues related to financial stability, financial markets and derivatives. He has authored articles on value at risk, stress testing, and credit derivatives. He served on the faculty of the University of Chicago’s Graduate School of Business for two years and as a visiting lecturer at Princeton University. He has a Ph.D. in economics from the Massachusetts Institute of Technology and a B.A. in economics from Stanford University.
Ryozo Himino
Vice Minister of International Affairs
Japan Financial Services Agency
Bio forethcoming
Sabine Lautenschläger
Member of the Executive Board
ECB
Sabine Lautenschläger was born in Stuttgart. During her career at the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) she held several management positions before being appointed BaFin’s Chief Executive Director of Banking Supervision in 2008. In 2011 she moved to the Deutsche Bundesbank, serving as Vice-President until January 2014 when she was appointed to the Executive Board of the European Central Bank. Since her appointment as Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM) in February 2014, she has also been responsible for ECB Banking Supervision. She represents the SSM in the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB).
José María Roldán
Chairman and CEO
Spanish Banking Association
José María Roldán was appointed Vice President of the European Banking Federation in 2015.
He is Chairman and CEO of the Spanish Banking Association since 2014, after 13 years as Director-General at the Banking Regulation and Financial Stability department of the Bank of Spain. During his time as Director-General, Mr. Roldan chaired both the Standards Implementation Group and the Joint Forum of the Basel Committee on Banking Supervision.
Mr. Roldán was the first Chairman of the Committee of European Banking Supervisors, the forerunner of the European Banking Authority, after being President of the Financial Action Task Force on Money Laundering.
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