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FRANKFURT, June 1 (Reuters) - Reporting requirements for European banks should be based on risk and not size, European Central Bank supervisor Pentti Hakkarainen said on Thursday, rejecting a German proposal to cut the reporting burden for smaller banks.
With a bank sector dominated by thousands of savings cooperatives, Germany is pushing for easier supervision of small banks, arguing that current rules place a disproportionate burden on small institutions which are already saddled by high costs and negative ECB rates.
"An approach to proportionality that relies solely on a size criterion would not be a risk-based approach," Hakkarainen told a conference in Lisbon. "The past has shown us many times that it is quite possible for small banks to cause severe disruption to the economy.
"So I advise against the proposal that I understand is currently under discussion, which would reduce reporting requirements for smaller banks in rather a crude way."
Instead, he advocated a more nuanced approach which would lower reporting requirements only for the least risky banks.
Bundesbank board member Andreas Dombret recently warned that smaller and medium-sized institutions - the vast majority of Germany's roughly 3,500 banks - are overwhelmed by the task of meeting compliance requirements due to the complexity of the regulatory framework.
Instead, the Bundesbank and Germany's financial regulator BaFin advocate what they call a small banking box, a separate framework smaller lenders, which would not affect capital or liquidity requirements but would still cut reporting and disclosure rules, essentially creating a two-tiered system. (Reporting by Balazs Koranyi and Andrei Khalip; Editing by Hugh Lawson)