Supervisory Risk Appetite, Efficiency, and Effectiveness

At a panel during the Basel Committee on Banking Supervision’s international conference last week, Frank Elderson, Vice-Chair of the Supervisory Board at the European Central Bank (ECB), outlined how European banking supervision is adapting to a more complex risk environment through sharper prioritization, simpler supervision, and timely remediation.

Elderson said the 2023 banking turmoil showed that banks “can meet all of the formal capital and liquidity requirements” while weaknesses in governance, risk culture, or business models continue to build. Through its risk tolerance framework, the ECB has therefore “consciously increased” its supervisory risk tolerance, allowing lower-priority areas at individual banks to receive less intensive scrutiny. He described de-prioritization as “an active and conscious supervisory judgment” rather than a consequence of limited resources. He further argued that a simpler framework places greater weight on supervisory judgment, not less.

The ECB is also seeking to reduce unnecessary complexity through its Next Level Supervision initiative. Elderson said it has reviewed more than 100 supervisory guidance publications, discontinued around 40, reduced approval times for standardized and lower-risk securitizations from three months to around seven days, and cut stress-testing data requirements by about 55%. The aim, he said, is to free supervisory capacity for material risks without weakening prudential safeguards.

Elderson also stressed the importance of timely remediation. He argued that supervision is effective only if identified weaknesses are addressed promptly and durably. He called for remediation plans that are proportionate, time-bound, and focused on root causes, backed by escalation where necessary. That includes using qualitative measures, such as requirements to strengthen governance, controls, risk management, or business practices, rather than relying solely on capital requirements.

Elderson also rejected the idea that resilience and competitiveness are competing objectives. “Strong prudential standards are not an obstacle to competitiveness,” he said. “They are one of its foundations.” At the same time, he argued that an increasingly interconnected system requires broader cooperation. The non-bank financial sector now accounts for more than half of financial-sector assets in the euro area, while AI-enabled cyberattacks and emerging quantum-computing risks are creating new operational threats. Addressing those risks, he said, will increasingly require supervisors to work with experts beyond the financial sector.