Small banking regime – an initiative by BaFin and the Bundesbank
BaFin and the Bundesbank have drafted a noteworthy non-paper in which they propose specific supervisory approaches within the framework of a small banking regime: small and non-complex banks that meet the defined criteria and optin voluntarily should be granted access to fundamental simplifications. In addition to the elimination of the CRSA, this includes further simplifications, some of which will have a significant impact on institutions.
Preliminary remark
The ideas put forward by the German Federal Banking Supervisory Authority (BaFin) and the Bundesbank in a non-paper entitled “A Simple Regulatory Regime for Small and Non-Complex EU Banks” mark a paradigm shift in terms of quantitative and qualitative banking supervision. This is complemented by a further document entitled “Reducing regulatory complexity”.
In diplomatic usage, non-papers are documents that are presented informally in order to test the acceptance of proposals by the other parties involved. For us, at any rate, this is reason enough for an in-depth examination of the content of the considerations contained therein.
This article is the start of a trilogy:
- Today we are focusing on the conceptual considerations for a “small banking regime”.
- We published another blog post “Reducing regulatory complexity in capital requirements: A solution approach by BaFin and the Bundesbank” on another non-paper.
- We published the third article “Business and risk policy implications of a small banking regime and reformed capital requirements” in October 2025.
Key Design principles for a Small Banking Regime (SBR)
In order to better understand the proposals in the non-paper, it is first important to know the framework conditions in terms of principles that BaFin and the Bundesbank have used as a basis for their subsequent considerations:
- Proportionality with purpose: Regulatory relief not as an end in itself, but as appropriately calibrated requirements that do justice to the actual risk profile of small institutions
- Level playing field: No distortion of competition between small and large institutions
- Financial stability: a small banking regime must not jeopardize financial stability (= macroprudential dimension).
- Clear eligibility criteria
- Voluntary opt-in approach
Which institutions should be able to benefit from a small banking regime?
The quantitative threshold is an upper limit of EUR 10 billion in total assets, calculated as a three-year average in line with comparable regulations. This proposal is flanked by further quantitative limits such as
- predominantly “domestic” business (focus = EEA)
- limited trading book activities
- limitation of derivative positions
We will provide a detailed description in the third article, as these criteria ultimately determine the business and risk profile of the institution and are intended to ensure a simple, less complex business model with limited market risk.
In addition, qualitative requirements are proposed in the non-paper. As most LSI institutions are allowed to meet these, we will not go into this in detail. Only an advance exclusion of institutions with “unusually high interest rate risks in the banking book”, institutions under increased supervisory control or comparable characteristics appears to us to be worth mentioning here.
The key requirement would continue to be compliance with a minimum leverage ratio that is significantly higher than the Pillar 1 requirements. This would then not only act as an access criterion, but also as a primary ongoing capital requirement, replacing the previous risk-based capital framework.
It is also worth mentioning that compliance with defined criteria is not automatic. Instead, a so-called opt-in is provided for: The submission of an explicit application for approval as well as a regular confirmation of the status as part of simplified reporting. There are also conceptual considerations with regard to an opt-out.
The proposals in detail
Capital requirements
The central element of the non-paper is the consideration of replacing the previous risk-based capital requirements (Total Risk Exposure Amount) with a simple leverage ratio requirement. This approach is intended to take account of the fact that for institutions with a low risk profile and no relevant systemic risk, the complexity of calculating risk-weighted assets brings only minimal regulatory benefits. At the same time, however, it causes considerable compliance costs. BaFin and the Bundesbank refer in particular to the insights of the Swiss small bank regulation and the CBLR framework of the United States.
The proposed abolition would not only affect the Pillar 1 requirements (P1R), but also all components of Pillar 2 (P2R, P2G) as well as the combined buffer requirements (CCB).
The Pillar 1 leverage ratio requirement is three percent in accordance with Art. 92 (1) CRR. Without BaFin and the Bundesbank having defined concrete quantitative proposals, a minimum leverage ratio similar to the Swiss small bank regime (8 percent) or the CBLR framework of the United States (9 percent) is likely to be considered for a small banking regime.
Part of this requirement should be held in the form of a (releasable) buffer. This part could then act as a macroprudential instrument – comparable to the objective and effect of the countercyclical capital buffer.
Overall, this proposal would introduce a far-reaching paradigm shift in banking supervision with regard to the assessment of normative capital adequacy.
Liquidity requirements
There is talk of abolishing the Net Stable Funding Ratio (NFSR), i.e. the structural refinancing ratio within the framework of the SBR. This could be replaced by a simple “lending ratio” measure, i.e. a maximum loan-to-deposit ratio (e.g. 90 percent). In addition, at least 10 percent of assets should be held in so-called highly liquid assets. From a supervisory perspective, this simplification would achieve comparable supervisory results with drastically reduced complexity.
Regulatory reporting and disclosure requirements
The idea is to comprehensively consolidate and simplify the current reporting obligations. The large number of current reports would be replaced by an “integrated reporting form” that covers key information relevant to supervision. In addition, the reporting frequency would be reduced in a risk-oriented manner. This would lead to a considerable reduction in the administrative burden on institutions without risking a loss of information for the supervisory authorities regarding their systemic assessment.
With regard to disclosure obligations, a (further) reduction is on the table – or alternatively a complete exemption.
Supervisory stress tests
BaFin and the Bundesbank are proposing to relieve institutions under the SBR of the extensive supervisory requirements for their stress test program in future. In its place, supervisory authorities could initiate top-down stress tests with standardized scenarios and simplified data input.
Remuneration
Articles 92 to 94 CRD contain extensive requirements for the remuneration regulations of institutions, which have been transposed into national law in Germany via Section 25a (5) KWG and the Remuneration Ordinance for Institutions. The idea is to exempt institutions with a low proportion of variable remuneration from the extensive requirements of the CRD. This would require a criterion that limits variable remuneration to a defined proportion of total remuneration.
EBA Guidelines
BaFin and the Bundesbank also transfer the basic idea of simplification and proportionality associated with the SBR to the EBA guidelines: In their assessment, the number and content of the EBA guidelines only insufficiently take into account the proportionality aspect. The considerations therefore address two aspects:
- Special regulations for SBR institutions
- In general, a much more principle-oriented formulation in order to take better account of the requirements of smaller banks in the national implementation of the supervisory requirements.
Assessment and outlook
Proportionality in banking supervision is a declared and credible objective of BaFin and the Bundesbank1. MaRisk itself has been formulated in a principle-oriented manner from the outset and expressly emphasizes the aspect of proportionality. BaFin’s supervisory communication of November 20242 created further simplifications with its clarifications and specifications. The current revision of MaRisk in this regard will represent a further consistent step.
With the non-paper presented, BaFin and the Bundesbank go well beyond this and make an important contribution to a constructive discussion on a small banking regime at the level of the European regulatory framework.
In this respect, it would be desirable for the “non-paper” to be successfully transformed into a consultation paper. Implementation would therefore involve amendments to the CRR and the CRD. However, the past has shown that where there is a common political will, pragmatic implementation solutions have also been found as part of the European legislative process.
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