We examine whether there is birthplace bias in addition to local bias in the portfolio choice of individual investors. We find that, on average, individual investors who live in their birthplace invest almost three times more of their portfolio capital in local firms than other locals. A bias toward birthplace firms persists for a long time after moving elsewhere and increases significantly for “homecomers.” Our detailed analysis suggests that individual investors’ proximity bias is largely an urban phenomenon, which is explained neither by the information hypothesis nor by the familiarity hypothesis. We find that more sophisticated investors, in terms of portfolio diversification, earn, on average, abnormal portfolio returns, but they do this regardless of their portfolio distortion. Thus, attention ought to be directed toward whether individual investors are financially sophisticated rather than whether they are proximity biased.

An “output characteristics” cost function is used to identify payment sources of technical change in European banking and estimate associated benefits. As the share of electronic payments in 12 European countries rose from 0.43 in 1987 to 0.79 in 1999 and ATMs expanded while the number of branch offices was constant, bank operating costs are $32 billion lower than they otherwise might have been, saving 0.38% of the 12 nations’ GDP. Policies facilitating these changes (antitrust exemptions to weakly coordinate implementation of payment service pricing) would permit benefits to be more fully realized.

This paper is based on a panel discussion at the international bank conference on Frontier Risks, Financial Innovation and Prudential Regulation of Banks in Gothenburg, Sweden, June 2–4, 2024. The panelists were Deborah Lucas, Jan Pieter Krahnen, and Magnus Olsson, with Ted Lindblom moderating. This paper contains the panel presentations, along with a unifying discussion by Paolo Fulghieri and Anjan Thakor. The main themes in the paper focus on how society should balance costs and benefits in designing the prudential regulation of banks. Optimal regulation should take into account how banks and markets interact, the dangers of both under-regulation that spawns excessive risk-taking and over-regulation that depresses value-enhancing innovation in financial services, the somewhat fragmented nature of national-sovereignty-constrained European banking and financial markets regulation relative to bank regulation in the US, and how prudential regulation can be improved by more explicitly dealing with interest rate risk.