European Central Bank Executive Board member Frank Elderson attends an economic conference in Nicosia, Cyprus November 21, 2024. REUTERS/Yiannis Kourtoglou

FRANKFURT (Reuters) -European Central Bank supervisor Frank Elderson on Friday backed simplifying rules for smaller lenders and whittling down capital requirements for the sector as a whole.

The ECB is drafting proposals to simplify banking regulation in the European Union, responding to banks' complaints that they are at a disadvantage to their U.S. peers, also due to U.S. President Donald Trump's deregulation drive.

Elderson proposed expanding a regime currently reserved for the region's tiniest and simplest institutions, which requires them to report just 30% of the data that larger banks must produce and to receive fewer inspections from supervisors.

"One could consider a more systematic application of this regime, as well as an increased scope," the Dutch legal expert told an ECB conference.

He added this could be done within existing law, maintaining a framework in which assets are weighed based on their risk.

The Small and Non-Complex Institution regime is currently applied to banks that have assets of less than 5 billion euros ($5.83 billion), a small trading book and little exposure to derivatives, among other criteria.

Germany, where regional and smaller lenders still make up nearly half of total assets, has been lobbying to create an entirely separate regime for smaller banks, which would require hard-to-pass changes to EU legislation.

Elderson also said the ECB could make its requirements more predictable and that there was scope for reducing the number of layers from the current nine, including those banks must have to absorb losses if they fail.

France has proposed subjecting Europe's biggest banks to a single buffer, rather than the current two, for the case of a failure.

An ECB task force will consider all proposals before making its recommendations to the European Commission by the end of the year. This is part of the Commission's broader simplification initiative.

($1 = 0.8575 euros)

(Reporting by Francesco Canepa; Editing by Sharon Singleton and Joe Bavier)