Proportionality of Banking Regulation Should Smaller Banks Regulation Be Simpler?

We investigate the case for a regulatory regime under which smaller banks face simpler, but not weaker, rules, and large banks are subject to more complex set of rules. It uses a DSGE model to assess welfare implications of such regime versus a one-size-fits-all regime, where all banks are subject to the complex set of rules. The simpler regime is not weaker; it does not reduce capital requirements for smaller banks, but allows for simpler calculation for these requirements, reducing compliance costs for them. Results suggest lower compliance costs for smaller banks simpler rules allow them to attract more funding and provide more lending. This increases total welfare by 2.8% relative to the one-size-fits-all regime. The simpler regime has also distributional effects, as it reduces the gap between welfare of borrowers and savers by 2.6% compared to the complex regime