The European University Institute, in collaboration with the Bank Policy Institute, held a research conference on May 18 that brought together academics, policymakers and market participants to examine the evolving landscape of bank supervision and regulation. The program featured six research papers, each discussed by both an academic researcher and market participant, as well as a panel discussion about the opportunities and challenges associated with advancing a European Savings and Investment Union. Patrick Montagner, a member of the European Central Bank’s Supervisory Board, delivered the keynote address.
The Usability of Bank Capital Buffers and Industrywide Risks
Jose Abad (Comillas University) presented his co-authored paper “The Economics of Capital Buffer Usability”. The authors note that while capital buffers are required to absorb losses, their use to support lending is discretionary and depends on: (i) the amount of usable capacity, (ii) the ability to rebuild buffers within a credible horizon and (iii) the extent to which deployment creates shareholder value. The paper evaluates buffer usability using both a calibrated theoretical model and econometric analysis of publicly listed U.S. and European banks. Expected returns are identified as the primary driver of buffer usability, which exhibits a non-monotonic relationship with the size of buffer release, peaking at releases of 1 to 2 percent of risk-weighted assets. Even at theoretically optimal release levels, however, banks are estimated to deploy only about half of the available capital. Taken together, these findings highlight a tension: while regulators design releasable buffers to support macroprudential stabilization, bank’s view buffer deployment primarily as a capital allocation decision.
Nordine Abidi (International Monetary Fund) presented his co-authored paper “Disciplining Digital Risk: Evidence from Cyber Stress Tests”. The authors argue that cybersecurity investment in the interconnected banking sector exhibits public-good characteristics, meaning that positive externalities can lead to systemic underinvestment by individual firms. To examine this issue, the paper analyzes confidential supervisory data from the European Central Bank’s 2024 Cyber Resilience Stress Test. The authors find that banks that had previously lagged in cybersecurity investment increased such spending by 34% relative to their peers following the exercise. This response was strongest among banks subject to especially intensive supervisory scrutiny. The findings highlight how supervisory oversight can help resolve coordination failures and strengthen discipline around cyber risk.
Andre Silva (Federal Reserve Board) was the academic discussant and Sarah Flowers (Bank Policy Institute) was the market participant discussant.
Bank Supervision Produces Unique Information and Influences Bank Behavior
Filippo Curti (Federal Reserve Bank of Richmond) presented his co-authored paper “Bank Supervision as Information Production: Evidence form U.S. Bank Holding Companies”. The analysis begins with a benchmark model in which supervisory ratings are conditioned on publicly available financial and market data, explaining a substantial share of the variation in ratings. The paper then explores the residual variation and finds that it is statistically related to examiners’ ability to acquire non-public information through physical proximity to banks, as well as to differences in examiner stringency and the broader macro-financial environment. The authors further demonstrate that these residual differences have real consequences: unexpectedly stringent ratings lead banks to reduce risk-taking and asset growth, while more lenient ratings are associated with greater subsequent risk accumulation.
Isabella Wolfskeil (Federal Reserve Board) presented her co-authored research “Mitigating the Risks of Deregulation: The Role of Supervisory Attention”. The paper examines changes to liquidity requirements for U.S. regional banks and finds that the easing of these requirements led to reductions in measured liquidity. At the same time, however, the affected institutions faced more supervisory scrutiny, as proxied by the number of hours supervisors spent evaluating them. These effects were strongest in Federal Reserve districts where supervisors oversaw fewer banks and have longer tenure. Taken together, the findings underscore the complementary roles of bank regulation and supervision.
Kasper Roszbach (Norges Bank) was the academic discussant, and Anna Dunn (JP Morgan U.K.) was the market participant discussant.
Bank Regulations Can Have Unintended Consequences
Melina Papoutsi (European Central Bank) presented research examining the incidence of compliance costs associated with the European Union’s large-exposure regulation. The rule imposes an exposure limit equal to 25% of bank capital and requires institutions to report exposures exceeding 10% of capital, as well as their 20 largest exposures. The analysis exploits a change that lowered the reporting thresholds and finds that banks responded by reducing exposures below the threshold and charging higher interest rates to their larger clients. These effects were strongest among smaller banks and unrated firms located in areas with weaker banking competition.
Consuelo Silva-Buston (Catholic University of Chile) discussed her co-authored research “Evading the Same Standards: Supervisory and Risk Convergence”. The paper examines the consequences of global harmonization in bank supervision using data on supervisory cooperation agreements. The authors find that banks in countries subject to these agreements tend to increase their exposure to common risks, resulting in higher systemic risk overall. While supervisory convergence may offer important benefits — such as reducing regulatory arbitrage and lowering compliance costs — the paper suggests that it may also entail financial stability costs by encouraging greater risk convergence across institutions.
Reint E. Gropp (IWH) was the academic discussant and Mónica Lopez-Monis Gallego (Banco Santander) was the market participant discussant.
Panelists Discuss Opportunities and Challenges for the Savings and Investment Union
Thorsten Beck of the European University Institute moderated a panel exploring the outlook for the European Savings and Investment Union (SIU), an initiative aimed at integrating and deepening Europe’s capital markets and reducing reliance on bank lending. The panel featured Margarita Delgado (former Deputy Governor of the Bank of Spain), Michael Faulkander (former Deputy U.S. Treasury Secretary), Lars Machenil (BNP Paribas) and Markus Ronner (UBS).
Building on the research presentations that preceded the discussion, much of the conversation focused on the regulatory cycle. Panelists reflected on the significant tightening of bank regulation and supervision following the Global Financial Crisis, as well as the more recent shift towards deregulation or recalibration. Drawing on their experiences over the past 15 years, they debated how policymakers can strike the appropriate balance between financial stability and economic dynamism. The discussion also touched on whether the U.S. and Europe have drawn different “lessons learned” from recent crises, potentially leading to greater fragmentation in global regulatory and supervisory approaches.
The panel also covered stablecoins, tokenization and the broader transformation of the financial system. Participants noted the U.S. engagement in terms of the volume of dollar-denominated stablecoins and the recent passage of the GENIUS Act. The discussion centered on whether Europe should take more proactive steps in this area and, if so, how bank supervisors should approach the associated risks.
Patrick Montagner’s keynote concluded the conference. He argued that Europe’s post-financial-crisis banking framework has succeeded — producing well-capitalized, more resilient banks — and that the region’s competitiveness challenge stems primarily from market fragmentation rather than overly stringent capital requirements. Montagner called for completing the banking union by enabling free cross-border capital flows within banking groups, harmonizing regulatory frameworks and finally establishing the European Deposit Insurance Scheme. He also endorsed ongoing ECB efforts to simplify supervision without sacrificing the forward-looking oversight that prevents bank failures.
