Fernando Restoy, Chairman of the BIS' Financial Stability Institute, reviews the concept, motivation and the constraints associated with the proportionality principle, and he compares the different approaches in various jurisdictions.
The increased complexity of the Basel standards strengthens the case for moderating the requirements in some cases - in particular, for institutions where the desired resilience can be ensured without invoking the framework's full complexity.
Yet, there is always a risk that the principle of proportionality could be misused to give a significant regulatory advantage to small institutions. This may not only be unwarranted from a prudential point of view but could also distort competition and prevent a necessary restructuring of the industry.
Arguably, the latter effect may become particularly relevant when technological innovation is likely to disrupt the market, as this will most likely modify the competitive position of traditional banks in varying ways depending on each institution's size, business model, adaptability and other characteristics. In order to exploit all potential social benefits associated with this innovation, regulation should aim to address emerging risks while minimising the impact on market dynamics and removing obstacles to an efficient restructuring of the sector.
In that context, the European banking sector faces specific challenges. In addition to the disruption that technology is likely to unleash on market structure, the sector may need to enter a phase of consolidation in order to gradually correct the current overcapacity.
For those reasons, the ongoing review of the European prudential legislation should ideally deliver a measured application of the principle of proportionality that is consistent with an orderly reorganisation of the industry.
Full speech
© BIS - Bank for International Settlements
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