ECB Shakes Up Supervision Model to Tackle Complex Risks

European banking supervisors are shifting their focus to a more risk-based approach in response to increasingly complex risks, such as geopolitical, technological, and climate-related threats. The European Central Bank's (ECB) supervision model now prioritizes capital, liquidity, governance, operational resilience, and structural risks like climate exposure.

The Next Level Supervision initiative has resulted in a 40% reduction in supervisory publications, securitization approval times have been cut from three months to seven days, and stress test data points have been halved by 55%. Euro area banks' return on equity (ROE) has stabilized at over 10%, narrowing the valuation gap with US banks.

The ECB warns that weakening prudential standards would risk lower resilience without guaranteeing stronger lending or competitiveness. Supervisors emphasize the importance of full Basel III implementation and deeper international cooperation to address emerging issues like AI, quantum computing, and climate-related risks.