In an interview, European Central Bank Supervisory Board Chair Claudia Buch said euro area banks are currently profitable and well capitalised, with non-performing loans (NPLs) around 2%, but warned against extrapolating current results and urged prudent profitability assumptions, capital planning and payouts. With aggregate payout ratios at 50-60% and buybacks accounting for roughly one-third, banks were encouraged to use strong earnings to bolster longer-term resilience, including capitalisation, information and communication technology and operational capabilities. Supervisory priorities were framed around macro-financial and geopolitical risk, and operational resilience, alongside continued implementation of Basel III. Digitalisation is a particular focus given rapid growth among more than 50 digital banks in the euro area and widespread adoption of artificial intelligence (AI), which is used by around 90% of ECB-supervised banks; supervision starts with mapping AI use and then assessing governance, controls and potential bias in lending decisions. The interview also flagged heightened cyber risk, increased outsourcing of critical functions and the use of tools under the Digital Operational Resilience Act to strengthen oversight of outsourced service providers, while noting continuing deficiencies in risk data aggregation at some banks. On credit risk, a project starting in 2026 will assess underwriting standards as a leading indicator for future NPLs, using existing data and seeking additional streamlined and proportionate reporting, including metrics such as loan-to-value and debt service-to-income ratios, with particular attention to pockets such as commercial real estate and small and medium-sized enterprise lending. Banks will also be asked to run a reverse stress test in 2026 and explain adverse scenarios that could challenge their business models. Buch supported the European Commission’s proposal to apply the Fundamental Review of the Trading Book from 1 January 2027, and outlined work to speed up approvals for securitisations with significant risk transfer while warning against lowering prudential standards and signalling scrutiny of complex synthetic structures; recommendations to simplify Additional Tier 1 instruments were described as input to a potential future legislative process.
European Central Bank - Banking Supervision 2026-01-28
European Central Bank outlines supervision focus on underwriting standards reporting, AI governance and reverse stress tests
European Central Bank Supervisory Board Chair Claudia Buch emphasized euro area banks' profitability and strong capitalisation, urging prudent capital planning and payout strategies. Priorities include addressing macro-financial and geopolitical risks, enhancing operational resilience, and focusing on digitalisation and AI governance, with a 2026 project to assess credit risk and underwriting standards as indicators for future non-performing loans.