Proportionality in banking regulation: Basel cross-country comparison

The international financial crisis in 2007-09 has effected the prudential regulation substantially. The regulatory framework is becoming still more robust and complex. This has strengthened the discussion on the principle of "proportionality", i.e. whether the same rules should be adopted across the sector or whether different size, complexity, interconnectedness or other criteria should be taken into account to adjust the regulatory rules especially to smaller and less complex banks.

The Basel concept embedded the proportionality principle by two basic aspects. First of all, it is intended for large, internationally active banks. Secondly, in many areas of regulation it provides a choice of approaches – either simplified/standardized approaches, or advanced approaches, frequently based on modelling.

The Basel issued a document in August 2017 comparing the current proportionality approaches in six jurisdictions: Brazil, the European Union, Hong Kong SAR, Japan, Switzerland and the United States. These approaches differ in the criteria and the thresholds used to decide which banks are subject to a specific set of rules, and also in terms of the regulatory standards that are subject to a proportional implementation.

The two proportionality strategies have been identified:

• categorisation approach for proportionality (CAP) where banks are assigned into categories according to different qualitative and/or quantitative characteristics and a specific regulatory regime for each category is applied;
• specific standard approach for proportionality (SSAP) according to which the tailored criteria for the application of specific requirements for individual subsets of prudential standards (e.g. disclosure requirements, liquidity ratios, large exposure limits and market risk) are stipulated. Under this approach a single bank may be categorized as “large” for a certain subset of regulatory rules where stricter requirements are applied on this bank while in other subset it may be understood as “small” bank with a relaxed standard.

The CAP approach has been broadly followed in Brazil, Japan and Switzerland, while the SSAP is applied in the EU, Hong Kong and the USA. In many cases, however, these two extreme schemes are applied in combination, i.e. specific exemptions can be granted in addition to the selection of banks into different regulatory categories.  

23-10-2017