Enhancing proportionality for small and non-complex banks

5 October 2026

By Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB

The diversity of the European banking landscape is one of its strengths. Alongside large and diversified banking groups, Europe also benefits from a dense network of smaller and local banks that are deeply rooted in their communities. These institutions play an important role in financing households and small and medium-sized enterprises, helping innovative ideas become successful products and supporting jobs and investment across the region. A banking sector that combines a range of business models, sizes and areas of expertise is better able to serve the financing needs of Europe’s economy. This is essential for competitiveness.

The diversity of EU banks is recognised in the EU prudential framework, in which the principle of proportionality and risk-based supervision are firmly embedded. Regulatory requirements, including reporting are applied according to banks’ size, complexity and risk profile. Supervisors also adapt the frequency and intensity of supervisory activities to banks’ specific complexity and risk profile.

Clearly, smaller and less complex banks are not immune to risk. Like all financial institutions, they face an increasingly uncertain external risk environment – think of geopolitical risks, cyber resilience in the age of frontier AI models, digitalisation and climate and nature-related risks. Depositors in smaller banks should be just as confident that their savings are safe and their bank is well managed, resilient and subject to robust risk management standards as those in larger institutions. A more efficient framework, strongly risk-based and focused on tackling the most material vulnerabilities, enables smaller banks to focus on their key risks, remain safe and continue playing their fundamental role for the economy.

Why proportionality matters

This is precisely what European banking supervision (which brings together the ECB and the national competent authorities (NCAs) has been focusing on: identifying where there is scope to enhance proportionality in how prudential rules apply to banks that, according to their size and complexity, are classified as small and non-complex institutions (SNCIs). These banks already strongly benefit from proportionality and risk based supervision: for example, already today they are required to report only around 30% of the data reported by larger banks.

Yet there is scope to go further still. Rather than creating a separate prudential regime for smaller banks, the ECB’s Supervisory Board considers the existing SNCI framework to be the natural foundation for further progress on proportionality. This approach ensures that the risk-based nature of the prudential framework is preserved for all banks.

Building on the recommendations of the High-Level Task Force on Simplification, the ECB and the NCAs within European banking supervision have together explored a range of ways to strengthen proportionality for SNCIs. Some of these measures can be taken by supervisors within the existing framework, while others would require changes to EU legislation or action by other European authorities. This initiative specifically focused on small banks comes on top of the broader simplification reform agenda being rolled out by European banking supervision, ambitiously pursuing efficiency, effectiveness and risk focus.^[1]

Broadening the scope of what “small” and “non-complex” means

The current definition of “SNCI”^[2] is already broad. As at December 2025, it covered 75% of all less significant institutions (LSIs) under European banking supervision and therefore more than 1,400 entities. To qualify, an institution must meet both size and complexity criteria. What constitutes a “small” balance sheet needs to be determined in the context of the national market in which an institution operates. That’s why we are proposing a change to the EU framework to enable national authorities to raise the total assets threshold in the SNCI definition – from the current €5 billion to as high as €10 billion – if they see fit based on the size and structure of their domestic LSI sector.

Likewise, we are suggesting changes to the regulatory framework to better capture what “non-complex” means in practice. Under the current regulation, only banks subject to, among other things, simplified recovery and resolution planning can be considered SNCIs. Drawing on their experience across a range of institutions, the ECB and the NCAs consider that reference to a liquidation strategy in a bank’s resolution plan would be a clearer indicator of the absence of complexity. This would address the fact that a substantial number of institutions, particularly in smaller Member States, do not currently qualify as SNCIs owing to purely technical aspects, even where they are not complex from a resolution perspective.

Together, the proposed changes to the SNCI definition could result in up to 85% of the LSI population falling within this category, allowing around an additional 150 banks to be classified as SNCIs.

Going forward, we also consider that the principle of proportionality should be underpinned by ensuring that the SNCI category is used systematically in prudential regulation. This would ensure that all new legislative files and updates to the existing regulatory framework include specific clarifications as to how they apply to SNCIs and would allow for a consolidated set of rules applicable for SNCIs.

Further embracing proportionality in supervisory activities

Changing the legislation to broaden the SNCI category is only one part of the solution. Proportionality and risk-based supervision can also be further enhanced through the way in which supervision is carried out in practice. Importantly, this would not need any changes to EU law.

For example, the Supervisory Review and Evaluation Process (SREP) and the related supervisory review of the internal capital and liquidity adequacy assessment processes are core components of the supervisory toolbox. Supervisors may – where considered appropriate from a risk perspective and sufficient to effectively fulfil their mandate – already assess individual risk elements only over a multi-year horizon. Going forward some entities may not be subject to the SREP for a period of two-to-three years. This of course requires supervisory discretion so that the SREP can still be conducted more often in cases where underlying risks warrant more intense scrutiny. Allowing for these “SREP-less intervals” could lighten the workload for banks, without affecting the quality of supervision. Put simply: where risks are low, some supervisory assessments will in practice be carried out even less frequently, reducing the burden on banks without undermining supervisory effectiveness.

Stress testing

As far as supervisory stress tests are concerned, we intend to conduct regular bottom-up exercises (in which banks run and submit their own stress projections) only very selectively for SNCIs. By relying instead on top-down approaches (in which the projections are run centrally by supervisors), the workload of almost 1,000 SNCIs which are currently still subject to bottom-up stress tests could be eased substantially.

Reporting

As far as reporting is concerned, various initiatives are already under way, with implementation planned for the near future. For example, our systems have already been adapted so that a materiality threshold for reporting resubmissions can be implemented, once the relevant legislative changes are finalised.

In addition, the introduction of the SNCI category in the ECB FINREP Regulation is due to start in 2027 with a public consultation, ensuring that all SNCIs benefit from a significant reduction in the volume of supervisory financial reporting compared with the full version (from around 13,500 to approximately 700 required data points). Meanwhile, the planned revisions to the EBA ITS on supervisory reporting are intended to result in the discontinuation of numerous templates, the elimination of overlaps and the exemption of SNCIs from certain templates.

Governance

The existing prudential framework already gives supervisors scope to apply certain governance requirements proportionately. We intend to use this flexibility more consistently across the euro area where warranted by the risk profile and complexity of an institution. Key aspects include, for example, the ability to combine certain committees such as the nomination and remuneration committees and functions such as risk management and compliance. Reinforcing greater flexibility in remuneration requirements could also encompass exemptions from the obligation to defer variable remuneration or pay it out in instruments. In addition, the periodic independent review of remuneration policies could be outsourced and applied proportionately to the sophistication of an institution’s internal stress-testing.

Proportionality does not mean lower prudential guardrails

Importantly, proportionality should not be mistaken for reducing prudential standards for smaller banks. The aim is not to lower standards, but to achieve them in a more efficient and proportionate manner. Importantly, any simpler regime for smaller banks must also be accompanied by a credible, flexible and efficient crisis management framework for these institutions. More proportionate and risk-based supervision can help smaller banks to devote scarce resources to focusing on the risks that matter most via sound risk management, serving customers, investing in their future competitiveness, enhancing efficiency and maintaining their competitive position in an increasingly technology-driven financial sector.

Next steps

The proposals developed by European banking supervision demonstrate that there is further scope to strengthen proportionality within the existing prudential framework. By reducing undue complexity and the administrative burden for small and non-complex banks, these measures can support the competitiveness of Europe’s diverse banking sector – without compromising resilience. This is not about lowering guardrails for small banks. It is about ensuring that supervision is risk-based, effective and proportionate.

As a next step, the ECB is already preparing to implement the proposed simplification measures that fall under its remit. Moreover, we will work closely with our institutional partners towards the implementation of measures beyond our direct responsibility to further enhance the simplification proposals for SNCIs in ongoing EBA initiatives.^[3]

In addition to these proposals focused on small banks, we remain fully committed to pursuing our ambitious simplification initiatives more broadly. Our goal is clear: to make our supervision more efficient, more effective and more risk-based, while continuing to preserve banks’ resilience.

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