Frank Elderson: Supervisory risk appetite, efficiency and effectiveness

Contribution by Frank Elderson, Vice-Chair of the Supervisory Board of the ECB and Member of the Executive Board of the ECB, at the BCBS international conference of banking supervisors panel on “Navigating the new financial landscape”

Banks are operating in an increasingly complex environment shaped by geopolitical fragmentation, rapid technological change, volatile energy and commodity prices, rising inflation, demographic changes, growing interconnectedness with non-bank financial institutions, and persistent climate and nature-related risks. What does it take for supervisors to remain effective and impactful in this new reality?

The challenge facing supervisors today is not simply that there are more risks. Rather, the risk landscape is increasingly uncertain, interconnected and volatile. But this does not mean that supervisors should try to monitor everything, everywhere, all at once. Quite the opposite. In a more complex world, effective supervision requires clearer, forward-looking prioritisation. In European banking supervision, we have therefore been adapting how we supervise. Our approach rests on three mutually reinforcing pillars: sharper risk prioritisation, simpler and more efficient supervision and timely remediation.

Supervisory risk appetite focusing on the root causes

We have learned – often the hard way when crises hit – that simply complying with minimum capital requirements is not enough to ensure banks remain safe and sound. The 2023 banking turmoil reminded us that banks can meet all of the formal capital and liquidity requirements, while underlying weaknesses in governance, risk culture or business models nonetheless continue to accumulate beneath the surface, until it’s too late[1]. In our supervision we therefore focus on material risks wherever they arise – be they risks to capital or liquidity, governance, operational resilience or structural risk drivers like climate and nature related or geopolitical risks.[2]