“It Takes a Lot of Hard Work to Make Something Simple” – The Complexity of Banking’s Simplification Paradox

"And how this will trickle down and make things even more complex", we could add....

It is a truth universally acknowledged—at least by those of refined intellect and pragmatic sensibility—that simplicity is rarely simple.

As Steve Jobs famously observed, achieving elegance and efficiency demands painstaking and gruelling effort.

Nowhere; at least not in my opinion, is this principle more vividly illustrated than in the realm of banking regulation, where the European Union's latest iteration of financial oversight, the CRR III, is a masterclass in the paradox of simplification. Almost metaphysical and quantumike. Like Schr?dinger′s cat.

The Art of Making the Complex Seem Simple

From January 1, 2025, European banks must navigate the latest Basel III-driven reforms, designed to fortify financial stability in a world still haunted by the specter and hailstorm of the 2008 financial crisis. The Capital Requirements Regulation (CRR III) is the final piece of the Basel Committee on Banking Supervision’s intricate puzzle—meticulously engineered to shield the global economy from seismic financial shocks.

But make no mistake: while the regulatory intent may be clear, the mechanics are anything but trivial.

The elegance of this supposed regulatory simplicity required a Gargantuan effort—years of meticulous negotiation, statistical modeling, data analysis and economic forecasting. The resulting framework is meant to enhance transparency and reduce systemic risk, yet its arrival firmly reshapes the landscape for banks, investors, and capital markets alike. And very few people outside of the banking sector are even aware of it.

Why is that a less then comfortable state of bliss for anyone within the PE, VC, Startup or Scaleup ecosystem? Is this something you should loose sleep over? Or at least take som basic interest in? I think you should.

What CRR III Actually Brings to the Table

In its latest form, CRR III revises capital calculation methodologies with a singular and very straightforward ambition: to make banking safer, more predictable, and less prone to creative accounting gymnastics and shenanigans. Key changes include:

• The Output Floor – A guardrail preventing banks from using internal models to excessively shrink their capital requirements, ensuring a minimum level of risk-weighted assets (RWAs) industry-wide.
• Credit Risk Overhaul – A recalibration of how banks assess and report credit exposure, shifting towards standardized models that enhance comparability and curb excessive risk-taking.
• Market & Operational Risk Adjustments – Stricter scrutiny of trading activities and operational resilience, placing greater emphasis on historical data and forward-looking risk metrics.
• A Uniform Framework – The EU's enforcement of Basel III fosters regulatory harmonization, eliminating cross-border discrepancies and reinforcing market stability.

The Balancing Act: Complexity, Simplicity, and Pragmatism, "May they live happily married ever after, or never meet"

It is a quintessential irony of regulation that efforts to simplify can often appear unduly intricate and very complicated.

Yet, as with well-designed software or a perfectly composed symphony, the true measure of success is not in its complexity, but in its seamless execution.

CRR III, if properly implemented, may reduce ambiguity, enhance financial resilience, and instill greater investor confidence—a long-term dividend that outweighs its initial complications.

Thus, the banking world finds itself at a potential inflection point, embracing a leaner, clearer, and more disciplined financial system. But as capital allocation shifts under these new constraints, what ripple effects will be felt beyond the banking sector? Who will be impacted?

An Unintended Consequence? The Domino Effect on Private Equity, Venture Capital, and Innovation

With banks facing stricter capital requirements and risk-weighting frameworks, the cost of lending is poised to rise. This will likely constrain access to debt financing, particularly for high-growth, high-risk ventures—the very lifeblood of the startup and scaleup ecosystem.

• Will private equity firms face steeper borrowing costs, forcing a recalibration of leveraged buyout (LBO) strategies?
• Could venture capital funds see a squeeze in funding sources as institutional investors rebalance portfolios towards lower-risk assets?
• Might these regulatory shifts inadvertently slow down Europe’s innovation engine by making capital-intensive, high-risk startups less viable?

Ultimately, the success of CRR III will not only be measured by its impact on financial stability but also by its unintended economic consequences. Will these new capital constraints foster a more disciplined investment environment—or could they stifle entrepreneurial dynamism at a time when innovation is needed most? Especially in Europe

How will these banking reforms reshape the broader financial ecosystem—from private equity and venture capital to startups and the future of European innovation?

Stay tuned for part 2!