Summary Financial Intermediation & Regulation | UA | 2025/26

Financial Intermediation &
Regulation
Prof. Jan Bouckaert
Prof. Jo Swyngedouw
2025-2026



Gabriel Gonzalez-Lopez




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,Financial Intermediation & Regulation 1
Chapter 1: What’s Different About Banks? 4
Part 1: The Operational Boundary of Commercial Banking and the Economic Rationale for Financial
Intermediation 4

Part 2: The Core Chemistry of Liquidity: A Simple Model 9

Part 3: The Mechanics of Liquidity Creation 13

Part 4: The Fragility of Trust: Bank Runs & Tipping Points 16

Part 5: The Rationale for Prudential Regulation 19

Chapter 2: A Rationale for the (Prudential) Regulation of Banks 21
Part 1: What is a Bank? Operational and Institutional Identity 21

Part 2: (Off-)Balance Sheet Banking Activities and Financial Chemistry 22

Part 3: Universal vs. Specialized Banking: The History of Regulatory Boundaries 23

Part 4: Why (Not) Regulate Banks? 25

Chapter 3: Prudential Regulation of Banks 28
Introduction: The Trilemma of Bank Regulation 28

Part 1: Regulation and Deregulation 29

Part 2: A Regulatory Incentive Scheme that Acts Like a Capital Structure 31

Part 3: Microprudential Reregulation 32

Part 4: Macroprudential Reregulation: Traffic Control & The Procyclicality Bias 34

Part 5: The Basel Evolution: Deep Dive into Basel I, II, III, and IV 36

Part 6: Crisis Management: From Bail-out to Bail-in (BRRD, SRM, and the CMDI Reform) 39

Chapter 4: Lender-Borrower Relations: Monitoring, Direct Finance, and
Financial Intermediation 42
Part 1: The Credit Market Under Moral Hazard 42

Part 2: The Credit Market Under Adverse Selection 44

Part 3: Imperfect Capital Markets & The Pledgeability Wedge 46

Part 4: The Coexistence of Direct Lending and Intermediated Lending 47

Chapter 5: Belgian and European Banking Sector: State of Affairs and
Challenges 52
Part 1: The Historical Reorientation of Belgian Banking 52

Part 2: The Modern Belgian Banking Landscape 53

Part 3: State of Play: Profitability, Solvency, and Liquidity 55

Part 4: The Challenges Ahead: Restructuring in a Volatile Macro-Environment 61

Part 5: Conclusion: "Repair the Roof While the Sun is Shining" 69

Chapter 6: The Role of the NBB in Financial Supervision 70

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,Introduction: The Supervisory Canopy and the Sovereign Sentinel 70

Part 1: The Twin Peaks Model and the European/International Context 70

Part 2: The Architecture of the Banking Union and the Single Supervisory Mechanism (SSM) 72

Part 3: Supervision in the Insurance, FMI, and AML Sectors 76

Part 4: NBB Supervisory Methodology, Tools, and Powers 77

Part 5: Governance Requirements in the Banking Sector (2.0) 78

Part 6: Internal Control and the Three Lines of Defense 81

Part 7: Emerging Challenges in Supervisory Governance 82

Chapter 7: Bank Prudential Standards – From Basel I to Basel III/IV 83
Part 1: Why Banks Need Capital? 83

Part 2: Forms of Capital (The Regulatory Capital Stack) 86

Part 3: Basel I (1988) – The Genesis of Risk-Weighting 87

Part 4: Basel II (2004–2006) – The Three Pillars and Internal Modeling 88
Part 5: Lessons Learnt from the GFC - Basel III & IV (The Reregulation Record) 91

Part 6: European Implementation: CRR3 and Deviations 94

Part 7: Conclusion: The Evolution of Stability 95

Chapter 8: Study Visit to the National Bank of Belgium (NBB) 96
Macroprudential Policy in Belgium – An Overview 96
Part 1: Financial Stability and Macroprudential Policy 96

Part 2: Powers and Instruments – Belgian and European Context 98

Part 3: Macroprudential Measures and Actions in Belgium 100

Part 4: Recent Development: Policy Simplification (November 2025 Announcement) 102

Q&A / Additional Key Concepts from Notes 103

State Aid and Financial Institutions 104
Part 1: The Core Philosophy of State Aid Control 104

Part 2: The Four Cumulative Criteria of State Aid 104

Part 3: Compatibility (exceptions) and the 2013 Banking Communication 105

Part 4: The Bank-Sovereign Nexus & The Banking Union 107

Part 5: The Bank Resolution Framework 108

Part 6: The Resolution Toolkit and the Single Resolution Fund 110

Part 7: The Depositor Loophole and the CMDI Reform 111

Part 8: Case Studies: Experience from Past Crises 112

The Digital Euro 114
Part 1: Structural Shortcomings of the Current Payment Landscape 114

Part 2: Governance, Geopolitics, and the Failure to Scale 116

Part 3: The Solution – The Digital Euro 117

Part 4: Benefits for the Broader Ecosystem 118

Part 5: Project Status and the Road Ahead (Late 2025 Timeline) 119




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, Chapter 1: What’s Different About
Banks?
Part 1: The Operational Boundary of Commercial
Banking and the Economic Rationale for Financial
Intermediation
To understand the modern financial landscape, we must first map the precise boundary that
separates a commercial bank from all other financial actors. Operationally, a commercial bank is
defined by its dual identity: it simultaneously grants loans to the public and collects deposits that
are withdrawable on demand. This structural pairing of assets and liabilities is unique.

« A bank is an institution whose current operations consists in granting loans and receiving
deposits from the public »

• Provision of liquidity and payment services to the grand public
• Each depositor is;
• Small, unlike institutional savers (individual savers)
• Ill-informed, they do not have the time, resources or expertise to fully analyze the bank’s
financial health or the quality of its loan portfolio
• The bank offers a public good
• Government intervention is appropriate;
• Protection of depositors
• Safe payment system

To see this uniqueness, contrast a bank with its financial cousins. A finance company operates on
the asset side by extending consumer and corporate loans, but it funds these assets by issuing
commercial paper and wholesale bonds on the market rather than accepting retail deposits; it is
virtually unregulated. Conversely, a money market mutual fund accepts public funds on the
liability side, but it is restricted on the asset side to holding highly safe, liquid, and publicly traded
market securities. A commercial bank sits uniquely in the middle, engaging in qualitative asset
transformation by turning liquid, short-term liabilities (deposits) into illiquid, long-term assets
(loans).

The Architecture of the Bank Balance Sheet
This operational reality is reflected directly in the structure of the bank’s balance sheet and income
statement. The traditional bank balance sheet consists of:
When presenting that traditional balance sheet structure, the core objective was to illustrate the
operational and structural pairing that makes banks unique, and inherently fragile.
This balance sheet is not just a list of items; it is a dynamic map of qualitative asset and maturity
transformation. Let us break down exactly what this architecture is designed to explain for your
course:


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