Larger banks have significantly higher total outlays to meet regulatory requirements, but smaller banks allocate a substantially higher proportion of their investment budgets, an industry poll has found.
Regulatory compliance functions make up a considerably larger proportion of total headcount at smaller banks compared to larger financial institutions, according to a survey published by the consultancy EY and Luxembourg Bankers’ Association (ABBL) on Thursday.
The report stated that “in 2024, the average investment costs were nearly three times higher for large institutions than for other credit institutions in our sample.” Investment costs refer to expenses required to meet new regulatory requirements, as compared to recurring costs, which is the expense budgeted to continue meeting current rules.
Recurring costs at significant credit institutions – who are directly supervised by the European Central Bank because they have large impact on the European banking market – are “five times higher” than banks mainly supervised by the Luxembourg financial regulator CSSF, the survey found. Significant credit institutions had recurring costs that were “six times higher” than branches set up in Luxembourg, which partially operate under the auspices of their parent group.
“Many smaller institutions often rely on regulatory projects being executed at the group level rather than locally, which can partly explain their lower average budgets compared to significant institutions,” the report said.
“Smaller institutions – such as credit institutions and EEA/non-EEA branches – bear a significantly higher regulatory burden compared to their scale,” the report found. “Large, significant credit institutions account for the highest absolute spending but show a much lower cost ratio relative to their size. Their scale enables them to absorb compliance costs more efficiently, demonstrating the importance of economies of scale in mitigating regulatory impact.
“Conversely, smaller institutions face disproportionately high cost ratios, meaning compliance consumes a larger share of their resources.”
Regulatory compliance represented 41% of total investment at Luxembourg banks in 2024, about the same figure as in 2013, although the proportion had dipped slightly in the late 2010s.
The report authors noted, as part of a recurring theme, that “smaller and foreign-based institutions […] tend to allocate a larger share of their investment capacity to compliance-related activities” than the biggest banks.
Looking at total headcount, the report said: “Large institutions can absorb compliance costs, as regulatory teams form a small share of their workforce. Smaller institutions, though leaner, devote a higher proportion of resources to compliance, reflecting greater relative burden.”
Methodology
The survey was completed by 22 banks authorised to operate in Luxembourg, all members of the ABBL, in July and August 2025. Private banks represented the largest self-declared segment (nine banks, or 41% of all respondents). Only two retail banks and three fund servicing banks participated.
A Luxembourg Times extrapolation based on the averages and segments described in the report indicated that the 22 surveyed banks collectively spent €255.8 million on regulatory compliance in 2024.