ECB to step up scrutiny of banks’ physical risks from 2027

The European Central Bank’s banking supervisors will examine how banks measure and manage physical risks more closely from 2027, citing data gaps, uncertainty in modelling and growing pressure on insurers and public support.

The ECB outlined the change in its November Supervision Newsletter, which also highlighted gaps in banks’ application of risk appetite frameworks and a planned revision of its supervisory assessment methodology. The newsletter is a collection of supervisory updates, data and interviews rather than a single new policy announcement.

The ECB says the revised methodology will take effect next year and cover short-term liquidity risk, the sustainability of funding and risk controls. It describes this as the final stage of an overhaul of the Supervisory Review and Evaluation Process, or SREP, begun in 2021.

The newsletter also reports that an ECB benchmarking exercise found good practice in banks’ use of risk appetite frameworks, alongside shortcomings in risk coverage, oversight and implementation. It says the findings indicate areas where banks could improve decision-making and risk management.

Separate figures show that significant banks’ return on equity reached 10.7% in the second quarter of 2026, its highest level since 2015. Their cost-to-income ratio was also at a record for that period, at 53.1%. The ECB attributes the results to higher operating income, driven by interest, fee and commission income, which more than offset rising expenses and equity.

The newsletter says more than half of loans by smaller banks were secured by real estate in the second quarter. The share rose from 47% in mid-2020 to 53%; those loans totalled €1,714bn, with 79.5% lent to households and 20.5% to non-financial companies.