ECB Adapts Supervision Approach Amid Rising Complexity

Banks are operating in an increasingly complex environment shaped by geopolitical fragmentation, rapid technological change, and rising inflation. European banking supervision has been adapting to this new reality with a focus on clearer, forward-looking prioritization.

The ECB's Vice-Chair of the Supervisory Board, Frank Elderson, emphasized that supervisors cannot operate with a zero-risk-tolerance mindset. Instead, they must become more focused and prioritize material risks wherever they arise.

Elderson highlighted the importance of risk-based supervision, which helps determine where supervisory attention should be focused. The ECB has implemented a dedicated risk tolerance framework (RTF) to clarify how much residual supervisory risk can be accepted when certain areas are reviewed less intensively or deferred.

The RTF aims to promote a culture shift towards greater risk appetite and prioritize substance over form. Elderson noted that this cultural shift is not something supervisors can deliver in isolation, but rather it requires the participation of all stakeholders, including banks.