In the euro area, there were 3.267 less significant banks (LSI) at the end of 2016, according to the latest ECB census. The set of Italian LSIs is the third in number (15% of the total), after Germany (53%) and Austria (16%). Unlike in other countries, such as France, local banks, while important, are consolidated into systemically important groups (BPCE, Credit Agricole), and are therefore not listed among the LSIs.
In the coming months in Italy the number of LSIs is destined to drastically reduce due to the cooperative credit reform process which will lead to the consolidation into three banking groups [2].
Regulation and proportionality
The current practice is to insert amendments or ad hoc provisions for LSIs with respect to the pre-existing legislation or when transposing international standards.
However in the last annual report on the Banking Union of European Parliament a request was formalized to the Commission to draw up a specific regulation for smaller banks, defined “small banking box”. This would be a set of rules applicable only to LSI banks with simpler, adequate and proportionate prudential rules for smaller banks appropriate to their business model. However, the project would not lack technical implementation difficulties, as also highlighted by the ECB.
La review of the European regulation by the Commission currently underway could already lighten the regulatory burden for smaller banks, envisaging, in the current version, a reduction in the burdens associated with regulatory compliance (reporting and disclosure obligations proportionate to the size of the bank, exemption on deferral and payment in of the variable component of the remuneration).
Supervision: towards harmonization with the methodologies applied to Significant Institutions
With regard to supervision, the ECB has repeatedly stressed the importance of adopting a proportional approach to the systemic importance and riskiness of banks. For this reason, every year the ECB, together with the individual competent national authorities, divides the LSI banks into three categories (with low, medium or high priority), thus defining the scope and intensity of supervision:
- Le Low priority LSI they are considered a very limited threat to financial stability and have manageable risk
- Le medium priority LSI have one of the following characteristics: (i) high intrinsic risk even if with low or medium impact on the system, (ii) low intrinsic risk but medium or high potential impact, (iii) medium risk and average impact potential
- Le High priority LSI they are instead those considered medium or high risk and high or medium impact (i.e. their failure can endanger the national financial system.
2017 was the year in which there was a decisive push towards harmonizing the rules and methodologies used for LSIs with those already in use for significant banks. Already in April the ECB harmonized the national options and discretions (ODN) also for less significant institutions. In July, Frankfurt announced the extension, developed together with the national authorities, of the SREP methodology to less significant institutions, with the aim of having a common framework – albeit adapted and simplified – applicable to LSIs in the euro area and which responded to the principles and methods used in the supervision of the largest banks. By 2020, all LSIs should be rated using this SREP methodology.
Finally, in January 2018, the Bank of Italy published the final version of the Guidelines for Italian LSI banks on the management of non-performing loans. This contains the expectations of the Supervisory Authority regarding the management of NPLs and is consistent with the "Guidance" for SI banks published by the Single Supervisory Mechanism. Also in this case, in application of the principle of proportionality, changes are envisaged which take into account the need for greater simplicity in the organizational structure of the LSI banks.
