In a keynote speech, Sharon Donnery, a member of the Supervisory Board of the European Central Bank, said ECB Banking Supervision is reshaping supervision to be more risk-based, forward-looking and outcome-focused as the euro area banking sector faces a more complex risk mix. She said banks remain resilient, with an average Common Equity Tier 1 ratio close to 16%, return on equity close to 10% in 2025 and an aggregate non-performing loan ratio of 2.2%, but warned that geopolitical tensions, trade fragmentation, energy and supply chain pressures, sudden market repricing, vulnerabilities in non-bank finance and private credit, and cyber threats amplified by artificial intelligence could interact and transmit stress in non-linear ways. In that context, she said simplification should mean a clearer and more effective framework, not weaker prudential standards or lower capital requirements. Donnery described geopolitical risk as a cross-cutting driver of traditional banking risks and said banks need forward-looking risk management that captures second and third-round effects. She also pointed to growing private credit exposures and said banks need better aggregation of direct and overlapping exposures, while cyber and operational resilience now require strong ICT asset inventories, tighter controls over software development and emergency changes, and clearer prioritisation of known vulnerabilities. On supervisory reform, she cited the ongoing overhaul of the Supervisory Review and Evaluation Process to make annual assessments more focused and tailored, more targeted supervisory work outside the annual cycle, and faster approvals for standardised lower-risk capital management transactions in less than two weeks instead of up to three months. She also referred to a revised Pillar 2 methodology to address overlap concerns with Pillar 1, a planned clarification in the ECB Guide to the internal capital adequacy assessment process that the management buffer is not an additional supervisory add-on, and a proposal for the Macroprudential Forum to take a more holistic view of overall capital demand across Pillar 1, Pillar 2 and national macroprudential buffers. On follow-through, she said the stock of outstanding supervisory measures remains high at around 100 per significant bank on average, although with varying severity, and that the ECB is sharpening its approach by concentrating on the most material prudential issues and escalating more consistently when remediation is insufficient. A new tiered approach now allows banks to close less severe findings directly while retaining evidence for later review, which could apply to around 35% to 40% of regularly identified issues. The ECB’s reverse stress test focused on geopolitical risk is due to be finalised this summer, and a cleanup exercise for the oldest delayed accumulated supervisory measures will start by the end of the year.
European Central Bank - Banking Supervision2026-06-11
European Central Bank Banking Supervision outlines risk based supervisory overhaul and plans year end cleanup of delayed measures
In a speech, ECB Banking Supervision said euro area banks remain strong but face a more complex mix of geopolitical, market, non-bank finance, private credit and cyber risks that requires more forward-looking supervision. Donnery said simplification should mean a more focused and effective framework rather than lower capital standards, highlighting SREP reforms, faster approvals for lower-risk capital transactions and a new tiered approach for less severe findings. A geopolitical reverse stress test is due this summer and a cleanup of older delayed supervisory measures is planned by year-end.