What Changed
- Implementation of a tiered scale classifying findings from F1 to F4 and supervisory measures from 1 to 4.
- Launch of a refocusing exercise in mid-October 2026 converting F1 findings into supervisory observations and removing mandatory internal audit checks for low-severity internal model findings.
- Reaffirmation of an escalation ladder utilizing capital requirements, business restrictions, and periodic penalty payments for unaddressed material weaknesses.
### Background and Context
On 6 October 2026, Frank Elderson, Vice-Chair of the Supervisory Board of the European Central Bank (ECB) and Member of the Executive Board of the ECB, contributed to a panel discussion titled "Effective Supervision and Enforcement" at the 17th FMA Supervisory Conference on "Europe’s Financial Future: Sovereignty and Resilience" in Vienna. His contribution addressed the relationship between administrative simplification and effective supervisory oversight within the European banking union.
European banking supervision is operating in an increasingly complex external risk environment characterized by geopolitical fragmentation, high asset valuations, AI-powered cyberattacks, interlinkages between banks and non-bank financial entities, and materializing climate and nature-related risks. To navigate these conditions, ECB Banking Supervision is reforming its dialogue with supervised entities by focusing attention on material risks while establishing proportionate mechanisms for low-severity issues.
### Supervisory Severity Scale and the Tiered Framework
ECB Banking Supervision categorizes supervisory findings on a scale ranging from F1 (low impact) to F4 (very high impact). Corresponding requests for remedial action—termed "measures"—are categorized on a parallel scale from 1 (low impact) to 4 (high impact).
Over time, supervisory findings accumulated across significant credit institutions. By the end of 2025, the total stock of outstanding supervisory measures across significant banks supervised by the ECB had reached approximately 12,000, representing an average of around 100 measures per bank across all severity levels.
To align supervisory follow-up with prudential risk, the ECB began implementing a tiered approach in 2025. Under this approach:
1. High-severity weaknesses require swift supervisory action, structured remediation paths, and mandatory supervisory follow-up.
2. Low-severity findings are processed through streamlined procedures. Banks can confirm that sufficient remedial action has been taken without submitting extensive supporting documentation, while keeping evidence available for future supervisory reviews.
According to data provided by the ECB, in 2025 the number of supervisory measures closed exceeded newly created measures by 1,200. In 2026, the stock of open measures decreased by a further 600.
### Mid-October Refocusing Exercise and Practical Reforms
Building on the tiered approach, ECB Banking Supervision is launching a refocusing exercise in mid-October 2026. Through this exercise, supervisors will critically review the stock of open measures accumulated in recent years and tailor future engagement based on severity, prudential relevance, remediation status, time elapsed since identification, and the likelihood of further supervisory intervention.
For supervised credit institutions, this process introduces specific operational changes:
- **F1 Findings**: The lowest-severity findings (F1) will be communicated to banks as supervisory observations rather than generating formal supervisory measures.
- **F2 Findings and Measures**: Low-severity F2 findings and measures will be handled proportionately and may be closed directly where further supervisory assessment is no longer warranted.
- **Internal Models Remediation**: For low-severity (F1 or F2) findings related to internal models, mandatory verification of remediation by internal audit or internal validation functions is eliminated.
Supervisors emphasize that remediation must address root causes within governance, risk management, internal controls, or business models. Supervisory remediation paths set ex ante will include proportionate steps, a final deadline, and appropriate interim deadlines.
### Escalation Ladder and Regulatory Enforcement
Where banks fail to remediate material weaknesses in a timely and durable manner, ECB Banking Supervision maintains an escalation ladder involving intrusive supervisory and enforcement tools. The available toolkit includes:
- Imposing additional capital requirements;
- Mandating qualitative measures, such as requiring banks to strengthen risk management;
- Imposing business restrictions; and
- Applying periodic penalty payments as direct enforcement measures.
Instruments are deployed based on the materiality of the weakness, the persistence of the underlying issue, and the degree of responsiveness shown by the institution.
### Frequently Asked Questions
**Q1: How does the ECB categorize the severity of supervisory findings and measures?**
**A1:** The ECB categorizes findings on a scale from F1 (low impact) to F4 (very high impact). Corresponding supervisory measures are categorized on a scale from 1 (low impact) to 4 (high impact).
**Q2: What changes apply to low-severity F1 and F2 findings under the ECB's refocusing exercise?**
**A2:** F1 findings will be communicated as supervisory observations rather than generating supervisory measures. Low-severity F2 findings and measures will be handled proportionately and may be closed if further assessment is unwarranted. Additionally, mandatory internal audit or validation verification is removed for low-severity (F1 or F2) findings concerning internal models.
**Q3: What enforcement mechanisms are available to the ECB when material weaknesses are not remediated?**
**A3:** The ECB's escalation ladder includes qualitative mandates to strengthen risk management, capital requirements, business restrictions, and periodic penalty payments.
**Q4: How did the total stock of ECB supervisory measures change in 2025 and 2026?**
**A4:** At the end of 2025, the stock of outstanding measures stood at around 12,000. In 2025, closed measures exceeded new measures by 1,200, and in 2026, the stock fell by an additional 600 measures.
Who May Be Affected
Significant credit institutions supervised by ECB Banking Supervision, supervisory authorities, bank risk managers, and compliance officers across the European Union.
Cross-Border Context
Applies across the European Union banking union framework to all significant institutions directly supervised by ECB Banking Supervision.
What to check next
- Monitor ECB Banking Supervision announcements in mid-October 2026 regarding individual bank disclosures and updated guidance on supervisory findings.
- Review institution-specific stocks of open supervisory findings and measures to determine potential reclassification under F1 or F2 rules.
This article provides general information and does not constitute legal advice. Consult the official text and obtain advice appropriate to your circumstances where needed.