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<p>Following the 2008 financial crisis, debates over the separation of commercial and investment banking reemerged and remain unresolved. The 2023 failure of Silicon Valley Bank, though not directly caused by its venture capital (VC) activities, highlighted the inherent volatility of the VC and startup ecosystem, prompting renewed attention to VC’s role within the separation principle debate. Proponents of strict separation argue that VC’s high-risk profile conflicts with banking’s risk-averse mandate, potentially increasing default risk. In contrast, opponents suggest that VC engagement may diversify banks’ business portfolios, given its distinct risk profile relative to traditional banking operations, and thereby reduce risk in line with modern portfolio theory. To empirically assess these competing views, this paper examines banks’ VC involvement using a novel dataset (2004–2023) from Taiwan’s bank holding companies. Descriptive analyses confirm that VC income exhibits higher volatility and is nearly uncorrelated with that of other business lines. However, panel data analysis using two-way fixed effects model reveals that increased VC investment is significantly associated with reduced default risk, as reflected in higher Altman Z’’ scores and lower probabilities of default. These findings suggest that VC participation can enhance portfolio diversification and financial stability, challenging the rationale for strict separation. Importantly, this result appears to hold only under appropriate regulatory constraints. The paper therefore proposes Taiwan’s regulatory model, which permits VC engagement subject to specific limits, as a potential blueprint for jurisdictions considering more flexible approaches.</p>

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Regulating Banks’ Engagement in Venture Capital: Evidence from Taiwan

  • 期刊论文

  • 发表日期：

    2025年9月25日

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  • Jui-Hsiang Chu

摘要

Following the 2008 financial crisis, debates over the separation of commercial and investment banking reemerged and remain unresolved. The 2023 failure of Silicon Valley Bank, though not directly caused by its venture capital (VC) activities, highlighted the inherent volatility of the VC and startup ecosystem, prompting renewed attention to VC’s role within the separation principle debate. Proponents of strict separation argue that VC’s high-risk profile conflicts with banking’s risk-averse mandate, potentially increasing default risk. In contrast, opponents suggest that VC engagement may diversify banks’ business portfolios, given its distinct risk profile relative to traditional banking operations, and thereby reduce risk in line with modern portfolio theory. To empirically assess these competing views, this paper examines banks’ VC involvement using a novel dataset (2004–2023) from Taiwan’s bank holding companies. Descriptive analyses confirm that VC income exhibits higher volatility and is nearly uncorrelated with that of other business lines. However, panel data analysis using two-way fixed effects model reveals that increased VC investment is significantly associated with reduced default risk, as reflected in higher Altman Z’’ scores and lower probabilities of default. These findings suggest that VC participation can enhance portfolio diversification and financial stability, challenging the rationale for strict separation. Importantly, this result appears to hold only under appropriate regulatory constraints. The paper therefore proposes Taiwan’s regulatory model, which permits VC engagement subject to specific limits, as a potential blueprint for jurisdictions considering more flexible approaches.