UBS' threat to move out of Switzerland
After having convinced UBS to take over its failing competitor Credit Suisse, Swiss authorities now like to hedge against a future failure of the remaining Swiss G-SIB, asking UBS for higher capital requirements, namely by increasing the deduction from CET1 capital for foreign subsidiaries to 100%. This has led to speculations that UBS might shift its headquarters from Switzerland to the US. My focus here is not on whether or not this will happen, but it is an interesting case to discuss the implications for the financial sector in Switzerland and for financial service provision, two different dimensions as we stress in this 2014 paper with Hans Degryse and Christine Kneer.
On the one hand, there are employment and taxation effects of a large bank leaving a country, although this might be mitigated by leaving the retail business in Switzerland. In 2024, finance and insurance activities accounted for 9.2% of gross value added in Switzerland, compared to 8% in the UK, 3.9% in Germany and 3.1% in France, though well below the 27% in Luxembourg. This clearly shows the importance of the financial sector for the overall economy in Switzerland. A relocation of UBS out of Switzerland would certainly reduce this value, not only directly but also indirectly by affecting ancillary business services linked to the financial sector. At a minimum, it would imply a transition period during which other financial institutions and other sectors might gain relative importance. Obviously, if UBS’ exit were to be followed by other institutions leaving that would exacerbate the situation, though there are no indications for such moves.
On the other hand, there is no reason to assume that financial service provision will suffer in Switzerland. Even if, following a relocation of its headquarters to the US, UBS would reduce its footprint in Switzerland, other financial institutions, including cantonal and cooperative Raiffeisen banks, will most likely fill the gap. While there might be negative repercussions for competition, this will most likely only hold in the short-term. There are thus few reasons to fear for the efficient provision of financial service provision in Switzerland.
Which brings me to back to the paper I mentioned above: comparing the effect of financial intermediation and financial sector size across a sample of 77 countries over the period 1980 to 2007 shows that intermediation activities increase growth and reduce volatility in the long run, while an expansion of the financial sector in size as no long-run effect on real sector outcomes, while over shorter time horizons a larger financial sector stimulates growth at the cost of higher volatility. So, for long-term development, financial intermediation is needed, not a large financial sector. This is something that regulatory authorities in Switzerland should take into account when discussing the capital requirements for UBS. Given the high costs of banking crises (and while the Credit Suisse failure could be managed with its merger with UBS, such a solution would not be feasible in the case of UBS’ failure), focusing on financial stability should be more important than satisfying return expectations of UBS investors.
1. December 2025
What’s wrong with politics? Short-cuts instead of strategic directions
I have not been able to post anything last week due to a heavy travel schedule. And that in spite of lots of things happening. I want to discuss briefly two issues that are close to my heart - Ukraine and post-Brexit UK.
On Ukraine, the recent peace proposal is a travesty. As some observers pointed out, it might have been the English translation of a Russian proposal, which the Trump Administration then ’sold’ as their own proposal, before they claimed that it was not their proposal and then again, that it was actually their proposal. Confused; nah - just a regular day in the White House! A deadline for Ukraine to say yes within a few days before claiming that more work had to be done. If anybody is still taking the US Administration serious as a policy making institution, with clear guidelines and a strategic focus, I wish you good luck. It seems government by X (or Truth Social), guided by one principle only: increasing the chances that Mr. Trump can claim next year’s Nobel Prize for Peace. No matter that the proposed deals goes against not only Ukrainian and European interests, but clearly against US interests (as pointed out even by Republicans) - I guess that is what you get if you let people without any experience whatsoever play diplomacy. And that is what you get, when personal interests dominate long-term political and strategic interests.
The bottom line of the conflict is this, in my view: the only way to achieve peace for more than two or three years in Ukraine and Europe is: (i) have Russia pay a heavy price for its aggression (financially, economically and politically), (ii) have full Ukrainian ownership for any deal, and (iii) make sure that there is sufficient deterrence against future Russian aggression. The proposal (from whoever it came) clearly fails all these three tests. As most people, I would love to see peace in Ukraine, but a peace that will create space for more Russian aggression and lay the ground for the next war is the wrong way.
This lack of considering the big strategic interests comes also through in UK politics. The constant U-turns and desperate attempts by Rachel Reeves to put together a budget that (i) satisfies self-imposed short-term fiscal limits, (ii) creates growth and (iii) satisfies Labour Lefties, has created a trilemma - it is impossible to do all three. Brexit has created a big hole in the UK’s GDP; curbing legal immigration further makes things even worse. Instead of standing up to the populists and make clear where the problems lie and what the solutions are - re-entering the Single Market and attracting talent (as pointed out byMartin Wolf) - the Labour government tries to beat the populists at their own game. They will fail and the UK will be even worse off!
These are sad times - the problems in the UK will primarily affect the UK, though it might give us a preview of what is ahead for the European Union, given similar challenges with populists throughout Europe. The mistaken attempt of the Trump administration to yield to the Russians to get to a short-term peace agreement will affect the future of all of Europe. Dark times are ahead!
24. November 2025
Geopolitical risks and bank supervision
In a recent background paper for the ECON Committee of the European Parliament, Brunella Bruno, Elena Carletti and I discuss the impact of geopolitical shocks on banks’ financial soundness in the Banking Union. Over the past few years, geopolitical shocks, including Russia’s invasion of Ukraine, the Israel–Palestine conflict, and the ongoing trade war are introducing new risks for European banks and supervisors. Not surprising, geopolitical risks have been identified as the first priority in the Single Supervisory Mechanism (SSM) Supervisory Priorities for 2025–2027.
We start with a framework for the analysis and distinguish between drivers, transmission channels and manifestations of geopolitical risk. The drivers of geopolitical risk include wars, sanctions, great-power competition and cyber hostilities, which differ from conventional risk drivers as they are less amenable to historical or statistical modelling. These shocks affect the financial system through three interconnected channels. The first is the financial markets channel, where shocks trigger uncertainty, valuation losses, and higher funding costs. The second is the real economy channel, where disruptions to trade, supply chains and investment weaken corporate repayment capacity and loan demand. The third is the safety and security channel, where geopolitical tensions manifest as cyberattacks or operational disruptions that undermine financial infrastructure. Ultimately, these channels translate into familiar banking risk categories—credit, market, liquidity, operational, legal and reputational risk, but their interaction magnifies vulnerabilities and often leads to contagion, procyclical amplification, and cross-border spillovers. It also engenders financial market fragmentation, which poses a threat to financial stability in itself by reducing opportunities for international risk sharing and diversification.
There has been a rapidly expanding literature exploring banks’ reaction to geopolitical risks. Banks with exposures to affected countries face higher credit risk not only on directly exposed loans but across balance sheets. Nevertheless, banks do not fully withdraw. They reduce cross-border lending but continue to lend through foreign affiliates, partly funded with local deposits, thereby limiting parent liability. Higher geopolitical risk abroad also spills over into domestic credit supply because consolidated capital requirements force banks to conserve capital by cutting lending at home. Stronger capital buffers mitigate but do not eliminate these effects. Evidence from the euro area confirms that exposed banks cut lending more after the Russian invasion of Ukraine, with stronger contractions in sectors reliant on Russian-aligned imports. While the impact faded after a few quarters, firms heavily reliant on exposed banks were unable to fully substitute credit, constraining investment and employment. Other work shows that conflicts reshape lending patterns: foreign banks reduce overall exposure to affected countries but increase financing for military and dual-use sectors.
At the aggregate level, geopolitical risk reduces bank stability and capitalisation, although the effects are non-linear. Moderate increases in geopolitical risk tend to have limited solvency effects, but extreme shocks erode capital ratios and increase systemic risk. For borrowers, geopolitical uncertainty raises financing costs: loan spreads widen, interest rates rise and funding costs rise, especially for globally integrated firms. Exposed banks also face higher market volatility, lower stock returns and elevated CDS spreads. Beyond balance sheets, geopolitical risk undermines financial infrastructure by reducing the likelihood of establishing cross-border fast payment system links, thereby raising transaction costs and counterparty risk and accelerating financial fragmentation.
What are the implications for bank supervisors? Geopolitical risk reinforces the need for stronger governance, risk data and capital and liquidity planning at the bank level, coupled with robust operational resilience against cyber and country-specific threats. Macroprudential tools, in particular releasable capital buffers, are well suited to absorbing shocks while preserving credit supply. Scenario analysis, both quantitative and qualitative, is essential for testing the resilience of banks and the system as a whole under unconventional shocks characterised by uncertainty and interconnection with other risks such as climate change or energy disruptions. Hybrid approaches, such as reverse stress testing, may also be particularly effective in combining the supervisory perspective with banks’ own assessments of geopolitical exposure. These approaches leverage the granularity of data and analysis available only to banks, while operating within a sound and consistent supervisory framework. This makes them especially valuable given the inherently unpredictable nature of geopolitical risk, as they enable the development of plausible yet forward-looking scenarios that capture both systemic and institution-specific vulnerabilities.
10. November 2025
Anti-Money Laundering - opportunities and challenges
FBF last week organised a one-day conference, jointly with the Leibniz Institute for Financial Research SAFE on Anti-Money Laundering at a Crossroads: AMLA, Digital and Geopolitics. The motivation: the recent establishment of the AML Authority in Frankfurt, the new kid in the European playground of agencies. The three panels brought together practitioners, academics and policymakers in the ear of Anti-Money Laundering in Europe, with a keynote speech by AMLA Executive Board member Rikke-Louise Ørum Petersen.
The initiative to establish AMLA came after a number of scandals - in 2017 news broke of 800 billion euros of suspicious transactions flowing through the Danske Bank’s Estonian branch from 2007 to 2015 due to missing internal controls. In 2018 ABLV Bank in Riga had to close after accusations of money laundering by US authorities. As so often in European history, it takes a crisis and the realisation that national solutions are not sufficient to come up with a European response to a continent-wide problem, in this case AMLA (a phenomenon also referred to as Monnet’s Law).
Nowadays, anti-money laundering is clearly even more of a challenge, given geopolitical changes, given that the US (who stepped in in 2018) are no longer willing to enforce the law and have become all but a non-cooperating jurisdiction; given that money-laundering is part of systematic attempts to get around sanctions. Technology plays an important role, both in money laundering (think crypto) but also as new instrument in anti-money laundering. And AMLA is established during a time when simplification is a new buzz word in Brussels and across the EU and we would like to minimise the bureaucratic burden on enterprises and households alike, an additional challenge for an EU agency just freshly established.
The special character about AMLA is that it implies not just a European solution to a continent-wide problem, but also a cross-sectoral solution where lots of different authorities are involved - supervision, financial intelligence, law enforcement. This implies (i) directly supervising selected financial sector entities that operate on cross border basis and present high risk of money laundering and terrorism financing, as well as indirectly supervising other entities in the financial and non-financial sectors, (ii) supporting and coordinating Financial Intelligence Units (FIUs) and (iii) complementing EU AML/CFT rules by developing regulatory and implementing technical standards and issuing guidelines.
It was interesting to hear that the private sector, including entities that will be possibly supervised by AMLA are very much in favour of this European solution, if it helps to get to a more harmonised and consistent approach across Europe, it reduces arbitrage and improves communication, and provides clear guidance and benchmarking. However, as also outlined on the AMLA website, this direct supervision will not happen until 2028. The institutions to be supervised are not yet known, as the risk model to determine them still needs to be developed, a challenge given the variation across sectors and jurisdictions; there is also a need for a supervisory framework and data!
However, the signals are good, with AMLA being able to hire good staff (even though at expense of national authorities). It will be important to build institutional trust through transparency and communication. Ultimately, the success of AMLA will depend on the cooperation with national governments and their willingness to help AMLA; the fact that one EU member state is still on the FATF grey list ("strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing”) is worrisome. There is certainly an important convergence process ahead of us!
One important question will be the effectiveness of AMLA in an increasingly fractionalised world with more limited international cooperation. Can the EU take over leadership in AML from the US; will other countries rise as centres for money-laundering if it becomes more difficult to do so in Europe? How effective can (and should) AMLA be in helping to enforce sanctions against rogue regimes?
One hot topic was the use of Artificial Intelligence. It can help both the criminals and the public authorities involved in AML. AI can be extensively used, but only with specific questions and with human oversight and explainability. Human and artificial intelligence together perform better than each individually. One important challenge (as has also arisen in other settings): who is responsible/liable for AI’s decisions? Of all the areas, this still seems the most uncertain one.
3. November 2025
Supervisory effectiveness
A recent report by the Institute of International Finance (a ‘lobby group’ for large global banks) gives a balanced assessment of supervisory effectiveness. While financial institutions clearly recognise the need for supervision and have lots of good things to say about their interactions with supervisors, they also point to overreach, for example in setting supervisory expectations, focus on non-material issues, and unpredictability in supervisory decision-making. I was recently invited to discuss a recent literature review on supervisory effectiveness at a workshop in Basel, which also included several representatives of large banks.
The first thing to note is why we need bank supervision. In an ideal scenario with perfect bank failure management and no "too-big-to-fail" institutions, reliance on bank regulation and supervision could be reduced. Similarly, if bank regulation perfectly aligned risk-taking incentives with social interests and was immune to the Lucas critique, less supervision would be needed. Effective market discipline of banks could also lessen the need for supervisory intervention. However, these ideal conditions are far from our current reality.
Post-2008, there's been a significant focus on regulation, particularly capital requirements, and extensive academic research on its effectiveness. However, supervision has gained increased attention since the euro debt crisis and the banking turmoil of 2023. This has led to more research using micro-data to examine bank supervision to gauge the effectiveness of specific supervisory tools. The evidence has shown that more on-site inspections are associated with lower bank risk (Delis and Staikouras, 2011) and that hands-on supervisors are less likely to tolerate zombie lending (Bonfim et al., 2023). Banks that undergo EU-wide stress tests reduce credit risk, particularly with intrusive supervisory scrutiny ( Kok et al., 2023) and supervisory downgrades of specific loans incentivises banks to take a more conservative approach towards the borrower in question (Ivanov and Wang, 2024,). A decline in experienced supervisors, on the other hand, can lead to increased risk-taking and reliance on low-quality capital (Kandrac and Schlusche, 2021).
However, a key question arises: Have supervisors overstepped, or do bankers still have control over their banks? The perception of supervisory actions often depends on the perspective. Banks weigh private costs and benefits, while supervisors consider social costs and taxpayer interests. Supervisors, however, might have personal incentives, like avoiding bank failures on their watch, potentially leading to risk aversion. The core challenge is defining the objective function for bank supervision: avoiding negative outcomes that are only noticeable when they occur.
This also relates to the question of rules vs. discretion. Over-reliance on rules can worsen situations, especially with bail-in rules. And if regulation is too complex, supervisors will have to spend too much time simply interpreting and controlling implementation. Discretion is essential, especially during crises, but it must be followed by review and accountability. The banking turmoil of 2023 has also shown that supervisors have to look beyond the rules on book, most notably, at business models and governance structures. And it is here that banks sometimes might feel that supervisors go beyond their brief.
There is still a lot to be learned when it comes to supervisory efficiency. Recent evidence points to the usefulness of suptech, as long as it stays under human oversight (Degryse et al., 2025). But in times of scarce resources, what are the most effective supervisory tools and instruments – which ones give the biggest bang for the bust? And how can supervisors minimise the risk of supervisory arbitrage?
Dialogue between supervisors and internal oversight, including bank board members is certainly an important component – which is also why today the Florence School of Banking and Finance hosts for the third time a joint seminar with ECB Bank Supervision that brings together bank supervisors and bank board members in the euro area. The keynote speech by Vice Chair Frank Elderson set the tone by focusing on what are supervisory requirements and where supervisors simply provide best practices without corresponding obligations for the banks, This is certainly the start of a conversation on possible simplification on supervisory processes without lowering resilience.
27. October 2025
Stablecoins – more on financial stability concerns
Important disclaimer: the following refers to a recent report and recommendation by the ESRB. I am currently Chair of the Advisory Scientific Committee of the ESRB and voting member of the General Board. However, the views expressed below are exclusively mine and do not necessarily reflect the official stance of the ESRB or its member institution
Stablecoins are not leaving the headlines. Global stablecoin market capitalisation has more than doubled over the past two years, primarily driven by USD denominated stablecoins. I wrote earlier this year about them, stating a certain scepticism. I continue to see the upsides and challenges. On the upside, they can be a useful financial innovation and a necessary source of competition for banks. On the downside, stablecoins are not really stable and can constitute a financial stability risk if not properly regulated and supervised. There is also a geopolitical dimension to this: The recent GENIUS Act, which supports the use of USD-backed stablecoins backed 1:1 by high-quality liquid assets like Treasury bills, reverse repos, and bank deposits, indicates a deliberate strategy to expand the investor base for US government debt through their integration into the stablecoin ecosystem. The ECB is concerned about reduced effectiveness of their monetary policy if USD denominated stablecoins gain in prominence. There are also financial stability concerns, related to the structure of stablecoins and their close interconnectedness with banks (e.g., under MiCAR, E-Money Tokens (EMTs) have to hold a minimum share of bank deposits in reserves (30% for non-significant EMTs and 60% for significant EMTs).
The ESRB today published a report on Stablecoins, Crypto-investment products and Multi-function groups. While covering a lot of ground, there is a special emphasis on third-country multi-issue stablecoins, which are of particular financial stability concern. This is a type of scheme that has been increasingly used and involves an EU-based stablecoin issuer collaborating with a non-EU issuer to jointly issue EMTs. These tokens share the same technical characteristics and are presented by the issuers as being interchangeable. In this scheme, each issuer operates under a different legal framework (e.g., US and EU) and the reserves backing the EMTs are also distributed across jurisdictions. The operation of third-country multi-issuer stablecoin schemes relies on the assumption that the regulatory frameworks of the jurisdictions involved are equivalent. However, this is not necessarily the case, as can be clearly seen when comparing the EU (MiCAR) and the US (Genius Act). Unlike MiCAR, the Genius Act permits redemption fees and explicitly restricts interest payments only for issuers, potentially allowing crypto exchanges to offer yield or “rewards”.
The different regulatory framework constitutes several financial stability concerns. First, a run could prompt holders of tokens from third-country issuers to seek redemption in the EU if conditions are more favourable there (e.g. due to redemption fees being prohibited under MiCAR), leaving EU holders of the same stablecoin vulnerable. This could put strain on its reserves, delay redemptions and amplify runs within the EU. Second, restrictions imposed by third-country authorities on the transfer of reserves between jurisdictions could exacerbate these risks during periods of stress.
Given these concerns, the ESRB has issued a recommendation to consider such third country multi-issuer stablecoins as not consistent with MiCAR. If the European Commission does not provide such a clarification on this issue, the ESRB urges relevant authorities (such as the European Commission, the European Supervisory Authorities and national supervisory authorities) to mitigate the financial stability risks arising from such schemes through appropriate safeguards, including enhanced supervisory measures, closer international cooperation and the introduction of necessary legal reforms.
One might argue – here they go again, Europeans trying to prevent financial innovation. But financial innovation that can be easily used for regulatory arbitrage, is being pushed by third countries for fiscal reasons, and clearly constitutes financial stability concerns should be regulated and supervised accordingly. And it is not hostility against stablecoins per se, but against a specific product, third-country multi-issue stablecoins. One important problem in this context is that the regulation and supervision of such schemes is on the national rather than European level, which might invite regulatory arbitrage.
Why now, if stablecoins have not really reached a critical mass in the overall financial system? It is indeed a forward-looking approach (an approach that financial stability and macroprudential authorities should always take); once the genie is out of the bottle, it might be much for difficult (both on the regulatory but also political level) to contain the risks.
For a follow-up discussion, join us on 5 November for an on-line seminar with Maria Demetzis, Richard Portes and Nicola Bilotta.
20. October 2025
Middle East – a moment of hope
The events in the Middle East over the past two years have been horrific. I have written about this before, taking a strong pro-Israel position. At the same time, I cannot close my eyes to the suffering of the Palestine people in Gaza. I share the frustration of many in Europe about the starving and dying Palestinians, but also the fate of the remaining hostages held by Hamas.
The Trump peace plan seems to offer a chance out of the ongoing war. I am still doubtful it will be implemented beyond the first stage (ceasefire and release of hostages) but hope springs eternal. It seems a fair plan that helps the suffering civilian population in Gaza, while making sure that the instigators of this war lose their role in any future Palestine administration. It gives no one everything but allows Israel to keep face and guarantee its security and the remaining Hamas fighters to keep their life. Again, most importantly, it relieves civilian suffering on both sides!
Here are some tentative conclusions that summarise my feelings and thoughts about this horrific conflict. And yes, they have evolved over the past two years.
Hamas is a terror organisation, not a liberation movement; it suppresses and terrorises its own people, using them as shield while its fighters are hiding cowardly in tunnels. There cannot be any future space for Hamas in the Gaza strip or elsewhere, as there was no space for the Nazi party (NSDAP) after the defeat of Germany in 1945.
One can condemn the horrific terrorist attacks on Israel on 7 October by Hamas, while criticising the refusal of the Israeli defence forces to allow for more humanitarian aid in the Gaza strip. The question whether or not the actions of the Israeli military constitute genocide is to be determined at a later stage but not central to the current discussion; there seems little doubt that war crimes have been committed.
One can support without any doubt the right of existence and self-defence for Israel, while at the same time criticising the Netanyahu government. In his attempt to hold on to power he has given in to a small minority within Israel who dream of solving the Palestinian question in the most radical and inhuman way possible and this is not acceptable. It is here where both domestic and international pressure should be applied.
There should be no space (no ifs no buts) for any antisemitism in this debate or public discourse across the globe. To put the parallel: we are not attacking Russians, their personal property or their churches because of the action of Putin (and in this case, there is only culprit for the war, which is Putin and only one aggressor, the Russian state).
Given the suffering on both sides, it is easy to take radical stances, and it is hard to have a balanced view. Above is an attempt. I know I am opening myself up to criticism from both sides but so be it!
13. October 2025
Venture capital in Europe
Earlier this year, the Florence School of Banking and Finance organized its Annual Conference, jointly with Banca d’Italia on Financing Growth and Innovation in Europe: Economic and Policy Challenges, summarised in this paper. As I was asked last week to discuss the role of venture capital in Europe at the Vienna Initiative Full Forum in Brussels, herewith some thoughts on the what, why and how of European venture capital (VC) – what is the state of affairs of venture capital in Europe, why does venture capital matter and how can we strengthen it?
At first look, venture capital in Europe dwarfs in comparison to the US. However, it has become more successful over time, as can be seen by an increasing share of European VC backed companies over the past decade in global value of VC backed companies, moving from 7% for companies founded in the 1990s, to 10% for companies founded in the 2000s, 14% for companies founded in the 2010s and 17% for companies founded in the last five years. Venture capital is especially adequate for funding for firms with long gestation periods and highly uncertain success probability. The graph in this blog nicely summarises the challenges such firms face – a long period of negative cash flow, technological challenges and subsequently commercial challenges. In addition, there is little if any tangible collateral to underpin bank debt, so that access to bank financing is often no option for such firms. Angel financing (rich individuals) or venture capital funds are thus better placed to provide such funding, combining funding with active engagement with the firm. Evidence has shown that VC finances innovation more effectively than other financial intermediaries; by “sorting, governing and certifying” innovative ventures, VC both selects the most promising companies and improves their commercial and R&D performance.
Why is the development of venture capital so important for Europe? Do we need the kind of enterprises that are funded by venture capitalists? Yes, we do, if we are interested in more innovation. Why can existing financial institutions not fund them? As already mentioned above, one strong argument is that many of these firms rely on intangible assets, which are unlikely to be funded by banks, given that they do not serve as good collateral. In a paper with José Albuquerque de Sousa, Peter van Bergeijk and Mathijs van Dijk we show indeed that the positive impact of banks’ liquidity creation on economic growth goes through tangible and not through intangible capital investment and that the positive relationship between banks’ liquidity creation and economic growth turns insignificant as the share of intangible assets increases beyond a threshold (which most countries in Europe have reached). In addition, by turning bank supervision in the euro area more stringent, the SSM has contributed to a lower intangible asset share of firms borrowing from significant institutions (which are under direct SSM supervision), an effect that is stronger in industries that rely more on intangible assets, as we show in this paper with Miguel Ampudia and Alex Popov. While positive from financial stability viewpoint, it has unintended negative growth consequences, unless that is that non-bank financial institutions, including venture capitalists can pick up the financing of intangible assets.
What are the factors that support a thriving venture capital ecosystem? On the demand side, (i) the presence of both technical and business talent, (ii) regulation and institutions that facilitate starting, growing, and closing down a business, (iii) the ability to attract and incentivise talent through performance-based compensation, and (iv) an entrepreneurial culture with mindset for scaling. On the supply side, (i) the existence of strong private institutional investors (pensions, insurance, etc), (ii) the presence of professionalised VC managers (not bankers or PE investors improvising as VCs), and business angels (often successful entrepreneurs that cashed out from successful exits), and (iii) the availability of adequate contract forms (i.e., the Limited Partnership structure) that facilitate the alignment of incentives across these players. In addition, exit options are important, be it in form of private equity funds, be it in the form of liquid primary and secondary stock markets. Market size or the possibility to concentrate in one city within a country is important. In summary, there is a need for an ecosystem of entrepreneurs, financiers, and supportive government policies. There is also an important time dimension as value is created by concentration and network loops (first movers are likely to be less successful than future ones). Building resilient and profitable ecosystems can take not years but rather decades
Based on this, what are specific policies to foster venture capital? The list is long and lots of patience is needed. The list of policies includes (i) a conducive regulatory and tax framework, (ii) conducive immigration policies to attract talent, (iii) promoting technology transfer, i.e. translate scientific research into more deep-tech companies, (iv) increasing the indirect (i.e. by institutional/specialised investors) exposure of European savings to private/listed equity and (v) marketing Europe to the global community of tech talent and institutional investors.
Governments can have an important role in creating the venture capital ecosystem. Government Venture Capital (GVC) programmes, if well designed, can generate a positive impact on innovation, growth and regional development through certification/anchoring/crowding-in effects; it is important to allow resources to gravitate towards a few select high-growth centres. While government intervention should have sunset clauses, there should be long time horizons, with regular performance reviews. A final warning is that governments should NOT try to pick winners.
A lot has been learned about venture capital, with many of the lessons coming from the US. More research is needed, also applying these lessons to Europe!
10. October 2025
Simplification or deregulation?
Simplification is the buzz word of the policy world in 2025, but what does it mean? At first look, it could simply mean a reduction in complexity of the regulatory framework, thus helping reduce compliance cost for the private sector. There is a strong case to be made for such simplification, but it seems there is more to this debate than this simple definition.
Regulation’s main justification are externalities from firms’ actions, e.g., environmental externalities, especially where ex-post adjudication such as through the court system might come too late. For banks, an important externality relates to repercussions of their failure for other financial institutions, depositors and borrowers throughout the financial system, and the real economy. These externalities - as they materialised during the Global Financial Crisis - have also been the motivation behind regulatory tightening, including the Basel III capital and liquidity requirements. Any cost-benefit analysis for bank regulation thus has to take into societal costs and benefits, beyond the costs and benefits for individual banks or the banking system as such. However, it should be forward looking and take a long-term view as fragility might come only in the future, and thus the benefits of regulatory tightening today; for example, the costs of more stringent capital requirement might become evident immediate in the form of lower lending, while financial distress could come within 10 or 15 years, when higher capital requirements might make banks more resilient to shocks.
While the Global Financial Crisis led to regulatory tightening, the political attitudes towards the banking system seem to have changed, not only in the US, where deregulation is one of the overall themes of the Trump administration, but also in other countries. And it is here where it gets tricky, as this is often framed as simplification or applying proportionality, the argument being that the regulatory tightening has gone too far over the past 15 years and is imposing too high costs on the financial sector, with negative repercussions for the real economy.
One clearly bad example, in my view, for such deregulation is the recent decision of the Federal Reserve Board to revise its supervisory rating framework for large bank holding companies (BCH). So far, a BCH is not rated as well managed if any of the sub-rating is considered deficient. The proposal would focus only on capital and liquidity and allows a BCH deficient in ‘governance and controls’ still to be considered as well managed. As pointed out by Governor Barr, this ‘proposal allows badly managed firms to be labeled as well managed.’. It also comes only two years after the failure of SVB, which clearly faced governance and risk management challenges.
In Europe, there are suggestions that the threshold, according to which banks should be supervised by the ECB (jointly with national competent authorities) rather than only on the national level, should be raised to adjust for inflation. Given the success of supervisory convergence within the euro area and the overall stronger resilience of European banks today than ten years ago, this is a rather strange proposal, especially in light of creating a Savings and Investment Union. It would definitely be a huge step back for attempts to finally move towards a Single Market in Banking within the EU.
Having said this, there is a strong case for regular reviews of the regulatory framework might be called. The Reserve Bank of New Zealand is currently undertaking such a review-cum-consultation of their capital requirements (the last one having been in 2019). As I am one of the external experts hired for this exercise, I will not express any views on the proposal, but find the process as such very insightful.
Returning to the theme of simplification, there is certainly space for simplification, for example when it comes to capital buffer overlap. Bundesbank board member Michael Theurer recently pointed to some of these in an FT op-ed, with eight parallel capital stacks for the largest European banks and the recent multiplication of buffers, such as conservation, countercyclical and systemic risk buffers.
In yet another proposal (and here it is not surprising that it comes from a supervisory authority of a jurisdiction with lots of small cooperative and savings banks) Michael proposes simpler capital requirements for smaller banks. When it comes to small banks with a clear, viable and stable business model, focusing on traditional financial intermediation, a less complex capital framework might work (though these banks already work with the standardised risk weight approach) Problem is if a bank grows very quickly. Again, looking back to spring 2023, while SVB was not under the Basel III regime, its rapid growth would have eventually put it into the category of such banks, but with a transition period. Given that high growth is a good fragility predictor, too long of such transition period might defeat its purpose.
There is a related debate about simplification in the area of bank supervision, but I will get back to this in a future blog entry, in line with my intention to clearly make a distinction between regulation and supervision, mentioned in my previous blog post. Just to say that regulation and supervision interact in its effectiveness. Too complex a regulatory framework can force supervisors to focus on interpretation of and compliance with such framework, rather than focusing on other supervisory tasks, such as risk detection and assessing governance and risk management structures. On the other hand, too ‘simplistic’ a regulatory regime (e.g., only a leverage ratio) allows for substantial arbitrage activities and thus might put a larger burden on supervisors to detect such activities and the consequent risks.
29. September 2025
Supervisory arbitrage and real effects, now forthcoming in JCF
There are papers that take forever to receive the final editorial stamp of approval and there are others that go through the process quickly. Back in March, I discussed the results of a recent working paper with Consuelo Silva-Buston and Wolf Wagner, the fifth in a series of papers that Wolf and I have written on cross-border supervisory cooperation. In this paperwe show that higher lending due to stronger supervisory cooperation between parent and third-party host countries results in positive effects for firms in the recipient country, both in terms of lending to (safer and more profitable) firms and higher investment and profits for these firms . Arbitrage can thus have a positive effect, in spite of financial stability concerns that we flagged in a previous paper. While we link the results to the broader literature on the effect of regulatory arbitrage, the reviewer (correctly) insisted that we should denote this as a result of supervisory rather than regulatory arbitrage.
Which brings me to a broader point – the academic banking literature has used ‘regulation’ and ‘supervision’ interchangeably, though they denote two quite different concepts. Regulations are the rules on the book (e.g., capital and liquidity requirements, activity restrictions) while supervision relates to enforcement of these regulation and – more broadly – monitoring of banks’ health by supervisory authorities. There is a wide literature on regulatory arbitrage (one of my favourite papers’ title is: When the cat is away, the mice will play, exploring the effects of regulatory restrictions in banks’ home countries on their behaviour in other countries where they have subsidiaries). In addition, there is an extensive literature documenting the reaction of banks to changes in regulation (including on the effects of the Basel III reforms) though identification is not always easy.
The literature on banks’ reactions to supervisory changes is somewhat smaller as data on bank supervision are less readily available. Examples include the effects of bank examinations and stress tests (e.g.,Kok et al., 2023, Bonfim et al., 2023and Ivanov and Wang, 2024,for a very good overview of the literature on bank supervision, see this paper by Beverly Hirlle and Anna Kovner). However, papers on supervisory arbitrage, i.e., risk-shifting by banks following supervisory actions, seem rather few. Ours is one of the few examples that document such arbitrage actions; in this case, with positive outcomes for the recipients of the additional lending.
22. September 2025
Interesting papers, September 2025
At the recent meetings of the European Finance Association I had the honour of chairing a session on Access to Finance, with three excellent papers. Tong Yu presented evidence on the effect of open banking in the UK. Specifically, open banking (which allows allows customers to share their financial information securely and electronically with other banks or other authorised financial organisations) enables small businesses to share their bank financial data with potential lenders. To asses theimpact, Tong exploits the fact that the UK’s open banking policy creates a discontinuity in firms’ eligibility to share data. Using a novel loan-level dataset covering the entire UK secured business loan market, he shows that firms eligible to share data are more likely to pledge assets like accounts receivable and inventoryas collateral, thereby improving their access to credit. These effects are more pronounced for firms facing greater information asymmetry and those with greater information available to share. These findings suggestthat open banking can help reduce collateral constraints by mitigating information asymmetry between borrowers and lenders. As the title of the paper suggests: datacan serve as collateral.
Shadow banks are a phenomenon not only in advanced but also emerging markets. In India, traditional non-Fintech shadow banks made up 41% of the total lending market in 2021 (by number of loans), while Fintech companies had 8% of all loans. Kim Fe Cramer and co-authors use credit bureau data on 648 million retail loans in India to examine the comparative advantages of shadow banks across different market segments. Using weather shocks as a proxy for credit demand, they show that Fintech companies respond more to demand shocks in lending markets that do not rely on collateral (as here information collection and processing is more important) . In contrast, non-Fintech shadow banks exhibit stronger responsiveness in lending markets that do rely on collateral. Exploiting geographic heterogeneity in the adoption of digital payments, the authors identify technology as the key advantage forFintech companies, while lower regulation is the key advantage for non-Fintech shadow banks. An interesting and novel perspective on the rise of non-bank financial institutions.
Revisiting the long-standing theme of the role of distance and bank size in financial service provision, Vojislav Maksimovic and co-authors examine the impact of bank branch proximity on the growth of small businesses, focusing on independent retail pharmacies in the period 2020-2022. Using detailed location and foot traffic data collected from cell phone GPS for over 20,000 pharmacies across 2,528 U.S. counties, they find that proximity to non-community (commercial) banks, particularly large banks, significantly boosts recovery of these independent (as opposed to chain) pharmacies. In contrast, community bank proximity shows no comparable effect. The effect is primarily driven by banks that place a greater focus on lending to small businesses. The effect is strongest in areas with high levels of small business lending and is further amplified by regulatory pressure stemming from Community Reinvestment Act (CRA) examinations of large banks. These findings challenge the conventional view that community banks are the main supporters of small businesses and highlight the critical role of large banks and, in particular, regulatory pressure, in promoting local economic recovery.
15. September 2025