ECB calls for modernising bank supervision without weakening resilience

The European Central Bank wants banking rules and supervision to be updated as financial risks evolve, while keeping safeguards strong enough to protect banks and the wider economy. In a speech in Frankfurt on 6 November, ECB Supervisory Board member Sharon Donnery said modernisation should cut unnecessary complexity and costs without weakening resilience.

Donnery argued that leaving rules and supervisory practices unchanged for a decade would risk leaving banks exposed to threats the safeguards were not designed to address, while wasting resources on requirements that had lost their usefulness. But she stressed that change is not automatically progress: reforms should be judged by whether they improve safety and soundness or reduce costs without undermining resilience.

Her remarks support the broad direction of draft principles published by the Financial Stability Board on 14 October. The ECB is also pursuing changes to simplify processes, use technology responsibly and focus supervision on the most important risks. Donnery invited financial institutions, researchers and civil society groups to contribute to the FSB consultation.

Risks that can spread quickly

Donnery pointed to risks that can interact across financial markets and sectors, including geopolitical shocks, high public debt, climate change, cyber threats and rapid technological change. She highlighted the growing use of private credit to fund artificial intelligence investment: banks can be exposed both through lending to funds and through lending to companies those funds finance, while limited transparency can make it harder to identify where leverage and potential losses sit.

She also warned that a cyberattack on a technology or critical-service provider used by several financial institutions could disrupt services across the system. Frontier AI models, she said, may shorten the time between discovering a software vulnerability and exploiting it. The timing and scale of AI’s broader effects on firms, jobs and borrowers remain uncertain, she added.

The ECB’s recent reverse stress test on geopolitical risks found that some banks projected only limited liquidity pressure in scenarios causing substantial falls in capital ratios. Donnery said that approach could miss how losses might undermine confidence and make funding harder to obtain; assessing risks separately could understate their combined impact.

Simplifying without weakening safeguards

Donnery said reform should target specific shortcomings, such as duplicated information requests, delays in addressing serious weaknesses or requirements that no longer capture risks effectively. She cited the ECB’s proposal to revisit a rule requiring internal models to be reviewed at least once every three years, arguing that detailed procedural requirements can divert supervisory resources from more material risks.