In the last twenty-five years (starting from the Council Directives 89/299 and 89/647), banking regulation in Europe has been shaped by the transposition into national legislation of the Capital Accords elaborated by the Basel Committee on Banking Supervision (BCBS) within the BIS (Bank for International Settlements) in Basel. The standards were designed to create a level playing field for large international banks. In Europe, the implementation process has, on the other hand, always referred to all banks, without distinction by volume of assets and type of operation.
In 2013, the European Commission reiterated and justified this unitary approach (one size fits all) in explaining the transposition of Basel III into EU legislation (CRR/CRD IV), "to avoid competitive distortions and regulatory arbitrage"[1]. However, the opposite can be argued: the increasingly complex Basel rules, the advantages in terms of capital absorption of advanced internal models and the implicit and explicit public guarantees for the very large systemic banks (too big to fail) have favored large banks, solicited arbitrage of capital rules, negatively impacting the competitiveness of regional/local banks with a "traditional" business model.
The unitary regulatory framework for banks therefore shapes the entire system of the Banking Union (defined in a broad sense) in Europe. The costs (operating and personnel) of compliance with a very complex regulatory system, which can be circumvented above all with transactions through derivative products (equally and even more complex), fall disproportionately on small/medium sized retail banks. Beyond the important aspect of ensuring a real level playing field for banking companies in Europe, the problem assumes great importance if and inasmuch as regional and local banks play a particularly incisive and significant role as local banks, in particular for micro and small-medium enterprises, essential components of the real economy and employment.
The business model of well-managed regional banks has a comparative advantage in financing small local businesses, even if they are part of larger supply chains. In particular, the micro-enterprise sector is in Italy, but also in Europe, the most significant in terms of job creation (and destruction), with highly pro-cyclical characteristics, as amply documented in the latest annual reports of the Banking Federation European. The links between regional banks and SMEs are very close, with significant feedback effects that amplify economic trends. In particular, micro enterprises are the ones that experience the greatest difficulties in external financing, due to the intrinsically less transparent characteristics of the balance sheets and the inevitable intertwining with the economic-financial situation of the owner/entrepreneur.
Even small businesses must move towards non-opaque models, with greater attention to profitability and company capitalization profiles. This is what is happening, also on the basis of the creditworthiness assessment models requested by Basel. However, it is necessary to avoid "throwing the baby out with the bathwater". The unitary regulatory model for banks adopted in Europe has had a negative impact on the flow of credit to small businesses and on local economies. The same statistics published by the European Central Bank on access to external financing for SMEs have highlighted clear symptoms of credit rationing in recent years (ECB, 2014).
These are not rear-guard arguments, which must give way to more efficient and evolved financing schemes. Conversely, it is necessary to recognize that advanced prudential regulation models should be less complex and in any case not penalizing for local and regional retail banks. In other words, the regulation of banks should be proportional and better articulated on the basis of the size and set of activities carried out by the banks, taking into account their systemic risk footprint. As will be illustrated below, these considerations do not represent a mere intellectual and academic exercise. An operating model different from the "one-size-fits-all" emerges from the prudential approaches developed, especially after the great financial crisis, in the United States and Japan and also in large emerging countries, such as China for example. In this work, however, specific reference is made to the comparison between Europe and the United States, with regard to regional banks.
The banking regulation on the capital of banks in Europe based on the Basel models is today very opportunely inserted - but, as mentioned, with a serious delay compared to the indications of the De Larosière Report (2009) - in the Banking Union process. This could be the occasion for a gradual reconfiguration of the more articulated and less complex system. On the other hand, the same Council Regulation which entrusts micro-surveillance to the ECB (1024/2013) underlines that the Bank in carrying out its functions is called to the principle of proportionality and "must show full respect for the diversity of credit institutions, for their size and business models. In any case, the European financial system is too bank-centric and cannot fail to evolve towards structures in which market intermediation plays a much more significant role.
Even for small businesses the role of bank financing cannot fail to be reduced. But the process must be gradual, it requires the activation of suitable credit securitization models, it cannot imply significant burdens for regional banks and local economies. Across the Atlantic, the Treasury and the Fed have already intervened since 2008 also with targeted actions for small banks, first to encourage the securitization of problematic loans, through the TARP, then for the securitization of performing loans through the Government Sponsored Agencies and the Small Business Administration.
To this end, the creation of ad hoc vehicles for the securitization of performing loans granted by regional banks to local micro and small-medium enterprises could dynamically allow for:
– significantly reduce the burden in terms of regulatory capital[2] for regional banks, given the diversification of portfolio risks deriving from the subscription of securities compared to the recognition of individual loans on the balance sheet;
– reopen an alternative refinancing channel for regional banks with a consequent significant containment of funding costs, which could largely be passed on to local micro and small-medium enterprises in the form of a reduction in interest rates and/or lengthening of the maturities (duration) of the financing;
– accelerate the process of credit intermediation on the capital markets as the securitization of credits would represent an intermediate step with respect to direct access to the market by SMEs. In fact, in this way SMEs would in the meantime have the opportunity to indirectly become familiar with the compliance and information disclosure requirements required for any subsequent direct access to the capital markets.
An operating model based on these considerations can be traced taking into account the different experience and regulatory models adopted in Europe and the United States.
In the United States, the tiered approach to bank regulation was introduced by the Dodd-Frank Act itself, together with macro-prudential surveillance and the mandate to the Fed to also pursue the objective of financial stability, in addition to the so-called Twin Peak; it was subsequently declined operationally by the Fed and other supervisory authorities.
As mentioned, in Europe the Commission has on the other hand adopted the unitary regulatory approach with de facto growing operating costs for small and medium-sized banks. The tables that I report on the morphology of the two banking systems are significant in this regard. Contrary to the theses also officially proposed by the ECB (2013), according to which the total number of European banks is higher than that of the United States and that this number of banks is declining more rapidly across the Atlantic, essentially the opposite appears to be true. The long-term trend relating to the concentration and reduction of the number of credit institutions is clearly evident both in Europe and in the United States. On the other hand, the data collected here indicate that small banks are rapidly disappearing precisely in Europe (3.265 "less significant banks" compared to 5.538 banks with Simplified Prudential Standards; it should be remembered that small - or "less significant" - European banks have total assets of less than €30 billion, while small US banks have total assets of less than $50 billion). These are data on which it is necessary to reflect, also and above all for the implications they have for the SME system. Unless the one-size-fits-all regulatory approach is swiftly changed, compliance costs, the ever-growing number and ever-increasing complexity of banking regulations are set to accelerate trends outlined here.
The complexity, the growing number and the continuous revisions of the rules that apply to banks, mainly, but not exclusively connected to the evolution of the Basel capital standards (for which Mark IV is announced) make compliance more and more onerous in terms of employees and costs for medium-small banks; create an artificial competitive disadvantage, which is not justified by the pursuit of financial stability and which goes against the principle of leveling the playing field.
Microprudential rules may, therefore, conflict with macroprudential objectives. The unitary approach to the rules and supervision of banking companies is incorrect, becomes counterproductive, creates disadvantages for small-medium banks and, consequently, for credit to households and SMEs at the local level.
The unitary regulatory and prudential approach, which is not intrinsically linked to the Basel Accords aimed at large international banks, was explicitly and formally removed in the United States by the Dodd-Frank Act (2010). The Fed and the other federal agencies continue on that basis in the articulation and implementation of a tiered approach.
In Europe, this has not happened, with negative consequences for growth and development, also because the role and significance of SMEs in the productive fabric of the EU, and especially in Italy, are particularly significant. As indicated above, the new rules on bank resolution and the bail-in approach are in fact proposing new disincentives for small banks. The current set-up needs to be reconsidered.
