What Changed
- Implementation of a dedicated Risk Tolerance Framework (RTF) enabling active, conscious de-prioritisation of lower-priority supervisory risks.
- Execution of the 'Next Level Supervision' initiative, significantly reducing processing times for securitisations and capital approvals.
- Emphasis on timely remediation and qualitative enforcement tools, including periodic penalty payments and business restrictions.
### Background
European banking supervision is adapting to an increasingly complex, interconnected, and volatile global environment. Financial institutions currently operate against a backdrop of geopolitical fragmentation, rapid technological transformation, fluctuating energy and commodity prices, persistent inflation, demographic shifts, expanding ties with non-bank financial institutions (NBFIs), and ongoing climate and nature-related risks.
Speaking on 30 September 2026 at the Basel Committee on Banking Supervision (BCBS) international conference of banking supervisors in Bali, Frank Elderson—Vice-Chair of the Supervisory Board and Member of the Executive Board of the European Central Bank (ECB)—outlined the strategic evolution of European banking supervision. Elderson stressed that effective supervision in an unpredictable environment does not mean monitoring every risk across every bank continuously. Experience from the March 2023 banking turmoil demonstrated that institutions can satisfy formal capital and liquidity minimums while underlying flaws in governance, risk culture, or business models accumulate undetected.
To address these structural challenges without attempting a zero-risk-tolerance approach, European banking supervision has structured its supervisory model around three mutually reinforcing pillars: sharper risk prioritisation, simpler and more efficient supervision, and timely remediation.
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### Core Pillars of the ECB's Supervisory Framework
#### 1. Sharper Risk Prioritisation and Supervisory Risk Appetite
Under its Risk Tolerance Framework (RTF), the ECB has consciously expanded its supervisory risk tolerance. While traditional risk-based supervision determines where attention should be concentrated, the RTF defines how much residual supervisory risk can be accepted when certain lower-priority areas are reviewed less intensively or deferred.
Key features of this pillar include:
- **Focus on Root Causes**: Prioritising material structural risk drivers—such as governance weaknesses, operational resilience gaps, climate and nature risks, and geopolitical exposure—rather than purely formal compliance.
- **Conscious De-prioritisation**: Treating de-prioritisation as an active, institutional judgment rather than a passive resource omission, meaning lower-priority areas at individual banks are not subject to intensive review every year.
- **Substance over Form**: Moving away from an overly risk-averse mindset, requiring banks to exercise judgment based on materiality rather than continuously demanding detailed formal guidance to seek legal certainty.
- **Primacy of Supervisory Judgment**: Emphasising that simplified rules increase the reliance on strong supervisory judgment, as regulations alone cannot capture every emerging risk or unique business model.
#### 2. Increasing Operational Efficiency Through Simplification
Through its "Next Level Supervision" initiative, the ECB has undertaken end-to-end reviews of supervisory workflows to eliminate duplication, accelerate decision-making, and restrict information requests strictly to what is necessary.
Tangible progress highlighted by the ECB includes:
- **Guidance Streamlining**: Over 100 supervisory guidance publications were reviewed; approximately 40 have been discontinued, with others undergoing targeted revision or deeper review.
- **Securitisation Approvals**: Turnaround times for simple, standardised, and less risky securitisations were reduced from three months to an average of approximately seven days.
- **Data Point Reduction**: Stress testing data requests were cut by around 55%.
- **Digitalisation**: Assessment times for fit-and-proper evaluations were shortened using digital and artificial intelligence (AI) tools.
- **Capital Decision Timelines**: Approval processes for capital-related decisions were reduced from several months to under six days.
#### 3. Timely Remediation and Full Use of the Supervisory Toolkit
The third pillar focuses on ensuring that banks remedy identified risks in a timely and lasting manner. The framework mandates that supervisory findings must be resolved at the level of their underlying root causes.
To enforce remediation, supervisors are expected to employ a structured escalation path utilizing the full supervisory toolkit:
- **Remediation Frameworks**: Supervisory expectations require remediation plans to be proportionate, time-bound, and root-cause-oriented.
- **Qualitative Measures**: Beyond capital requirements, supervisors deploy qualitative measures mandating changes to governance, internal controls, risk management, or business model practices.
- **Enforcement Tools**: Where banks show lack of responsiveness or persistent weaknesses, supervisors escalate measures to include business restrictions or periodic penalty payments.
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### Practical Implications for Banks and Market Participants
1. **Shift in Compliance Culture**: Euro area banks are expected to take greater responsibility for applying rules based on materiality. Continuous requests for detailed guidance to eliminate legal ambiguity run counter to the ECB's push for a simpler, less prescriptive supervisory environment.
2. **Faster Administrative Processes**: Banks benefit from significantly reduced timelines for routine capital decision approvals, fit-and-proper assessments, and standardised securitisation filings.
3. **Operational Resilience Focus**: Institutions must bolster resilience against technological and cross-sectoral threats. This includes addressing advanced AI-enabled cyberattacks, preparing for quantum computing risks to cryptography (such as "harvest now, decrypt later" data harvesting), and assessing climate/nature transmission channels.
4. **Interconnectedness and Non-Banks**: With the non-bank financial sector having doubled since 2008 to represent over half of euro area financial assets, international policymakers and supervisors are pushing for greater transparency and enhanced reporting in private markets to prevent systemic stress spillovers.
5. **Competitiveness and Financial Stability**: Elderson emphasized that prudential standards do not conflict with banking sector competitiveness or growth. Euro area bank return on equity has stabilised at over 10%, with price-to-book ratios reaching close to 1.5, reflecting enhanced market recognition of bank resilience.
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### Frequently Asked Questions
**Q1: What is the ECB's Risk Tolerance Framework (RTF)?**
**A:** The RTF is an institutional framework that clarifies how much residual supervisory risk the ECB can accept when lower-priority risk areas at individual banks are reviewed less intensively or deferred, enabling supervisors to focus resources on material root causes.
**Q2: How has the ECB reduced administrative turnaround times for banks?**
**A:** Through process simplification and digitalisation, the ECB reduced approval times for capital decisions from several months to under six days, cut processing for simple securitisations from three months to around seven days, and reduced stress testing data points by approximately 55%.
**Q3: What tools can supervisors use if a bank fails to address supervisory findings?**
**A:** Supervisors can escalate enforcement using a toolkit that includes qualitative requirements (mandating changes to governance, controls, or business models), capital requirements, business restrictions, and periodic penalty payments.
**Q4: How does the ECB view the relationship between bank resilience and competitiveness?**
**A:** The ECB views resilience and competitiveness as mutually reinforcing. Strong prudential standards provide the foundation for stability, economic growth, and sustainable profitability, as demonstrated by euro area banks' return on equity reaching over 10% and price-to-book ratios approaching 1.5.
Who May Be Affected
Euro area credit institutions, financial market participants, non-bank financial institutions, and European banking supervisors.
Cross-Border Context
Direct relevance to international supervisory standards (BCBS / Basel III implementation), global non-bank financial institution oversight, and euro area banking sector competitiveness relative to US counterparts.
What to check next
- Track ECB announcements regarding additional Next Level Supervision workflow updates and guidance revisions.
- Monitor global progress on full and timely Basel III implementation across key international jurisdictions.
This article provides general information and does not constitute legal advice. Consult the official text and obtain advice appropriate to your circumstances where needed.