Bundesbank resorts to random selection process to eliminate restrictive measures
German financial regulators, spearheaded by BaFin under President Mark Branson, are actively pursuing simplifications in banking regulation to cater better to the needs of smaller institutions. These efforts aim to make regulatory requirements more proportionate and tailored, reducing unnecessary complexity while maintaining robust risk management and financial stability.
In a self-reflective appraisal of rules and procedures, several strategies have been identified. Michael Theurer, responsible for bank supervision at the German Federal Bank, discussed these approaches during the Retail Bank Day of the Börsen-Zeitung. He emphasized that initiatives for streamlining are either already underway or being explored, yet minimum standards will not be compromised.
To tailor regulations, BaFin is adjusting stress tests and reporting for smaller banks according to their size and risk profile. Almost a thousand banks and savings banks in Germany have already benefited from these modifications. The "Minimum Requirements for Risk Management" (MaRisk) are also being reviewed in 2025 to make them simpler and more relevant for smaller institutions.
BaFin is cautious about applying all European Union guidelines, especially new Environmental, Social, and Governance (ESG) requirements, to smaller banks. This approach avoids overburdening these institutions with non-essential compliance tasks.
A potential solution is creating a regulatory "box" for smaller banks, offering clear, simple rules to reduce operational burdens without sacrificing appropriate risk standards. The focus of true simplification should be on making rules clearer and more straightforward to implement, not on reducing substantive requirements like capital or liquidity buffers, which remain essential for ensuring financial stability.
Comparable models from the United Kingdom and Switzerland may offer valuable lessons. The UK has implemented a framework distinguishing between systemically important and smaller, less complex banks. For the latter, the Prudential Regulation Authority (PRA) has introduced streamlined reporting and risk management requirements, focusing on proportionality.
Swiss regulations embody a risk-based, proportionate approach. Smaller banks are subject to less stringent capital and reporting requirements compared to larger or systemically important banks. Swiss regulations also differentiate between classes of banks in terms of liquidity and risk management.
Collaborative initiatives between BaFin and the Bundesbank for 2025 prioritize addressing credit risk, IT security, governance, and interest rate risks. Digital transformation and demographic change are also medium-term priorities. Both organizations are exploring the use of innovative technologies, including artificial intelligence, to streamline supervisory processes and reduce bureaucratic burdens.
While BaFin focuses on simplifying national rules, it is careful not to adopt all European Banking Authority (EBA) or EU guidelines for smaller banks, ensuring that regulatory alignment does not overburden them.
In the context of ongoing efforts to simplify banking regulations, BaFin plans to adapt stress tests and reporting for smaller banks according to their size and risk profile, mimicking the UK's approach towards less complex banks. Furthermore, BaFin is reviewing the Minimum Requirements for Risk Management (MaRisk) in 2025 to make them simpler and more relevant for smaller institutions, aiming for a regulatory "box" offering clear, simple rules that reduce operational burdens without compromising appropriate risk standards in the finance sector.
