BaFin Links Greater Proportionality for Smaller Banks to Responsible Use of Supervisory Leeway

Key Takeaways

• At its second Proportionality Conference, BaFin said that simplified supervisory rules for less significant institutions (LSIs) give banks more freedom, but that freedom depends on responsible use.
• BaFin ties its push for a small bank regime in Europe to LSIs avoiding unnecessary restructuring and showing sound risk judgment.
• Compliance teams should expect a more principles-based, trust-driven supervisory dialogue in which citing legal provisions alone will not be enough.

Deep Dive

At its second Proportionality Conference, BaFin said that simplified supervisory rules for less significant institutions (LSIs) give banks more freedom, but that freedom depends on responsible use. BaFin ties its push for a small bank regime in Europe to LSIs avoiding unnecessary restructuring and showing sound risk judgment. Compliance teams should expect a more principles-based, trust-driven supervisory dialogue in which citing legal provisions alone will not be enough.

Several concrete changes were cited. About 20 BaFin proposals for national legislation were implemented or are in the legislative process in 2024 and 2025. These include discontinuing the large loan reporting requirement to avoid duplicate reporting. The Banking Act (KWG) amendment, in force since April 2026, introduces simplifications such as de minimis thresholds for transactions involving members of corporate bodies and changes to the disclosure of financial circumstances. In supervisory practice, the LSI stress test, run jointly with the Deutsche Bundesbank, now uses significantly leaner data collection, with savings of at least one-third for all institutions. The new MaRisk guidelines have been streamlined by 30 percent and are more principle-oriented. BaFin is also lobbying the European Banking Authority (EBA) to simplify European standards and guidelines. No new binding deadlines were announced.

Compliance teams should take several steps. First, map the KWG amendments and the revised MaRisk to existing policies, and retire obsolete controls, such as the discontinued large loan reporting process, only after documented impact assessments. Second, avoid unnecessary restructuring, but document the rationale for any changes to processes or controls. Third, strengthen internal documentation of risk-based judgments, since principle-based rules shift the burden of justification to the institution. Fourth, update stress-testing data processes to reflect the leaner LSI collection. Fifth, consider engaging with industry associations and BaFin to support the European proportionality agenda.

The risk implications are mixed. Lower reporting and data burdens reduce operational cost and the risk of technical noncompliance. Principle-based requirements raise interpretation, governance, and conduct risks, and supervisors will be able to change course quickly if institutions misuse the flexibility. Institutions that cannot show robust risk frameworks may face closer scrutiny, and sector-wide misuse could undermine prospects for a European small bank regime. Branson's remarks suggest that individually tailored risk approaches may also improve system-wide resilience.

Source: Federal Financial Supervisory Authority