ECB’s Nagel Warns Against “Race to the Bottom” in Banking Deregulation, Calls for Targeted Simplification

28 November 2025

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Friday that policymakers should pursue a “well-thought-out” streamlining of bank supervision, arguing that regulatory complexity has grown to a point that it is depressing the productivity of European banks.

In a speech at the Bayerischer Bankentag 2025 in Munich, Nagel, who heads the Deutsche Bundesbank, said that supervisory rules had “become increasingly complex over the years” and that this factor “negatively impacts the productivity of European banks,” and thus rules should be simplified.

However, he said any effort to reduce redundant or overlapping requirements should not be confused with deregulation.

“Simplification refers to the reduction of unnecessary complexity in banking regulation,” he said. “However, what we do not want to achieve is deregulation, which would lead to higher risks to financial stability.”

He stressed that Europe must avoid “a global race to the bottom in financial regulation,” warning that such an approach “would undermine the stability of the financial system worldwide, ultimately benefiting no economic region.”

While acknowledging “significant growth” in financial sectors outside the regulatory perimeter, such as private credit funds, he said the policy response should not be to dilute rules that have worked.

“Instead, we should close loopholes and, where necessary, extend regulation to previously unregulated areas,” he said.

Nagel highlighted two structural issues that, in his view, required attention. First, the proliferation of rules can make it difficult for banks and supervisors to determine which requirement is actually binding at any given time, owing to interactions with institutions’ capital structures and buffer composition.

Second, he said, the number of capital measures can create unintended side effects that “undermine the actual purpose of the supervisory measures.”

Nagel outlined two concrete avenues for simplification: combining the countercyclical capital buffer and the systemic-risk buffer into a single macroprudential tool and introducing a “small bank regime” without risk-weighted requirements but with higher leverage ratios.

“We are only at the beginning of a long journey,” he said, adding that the next step is to “concretize and elaborate the proposed measures in detail.” Effective simplification, he said, would support bank efficiency and “contribute to more dynamic growth in Europe.”