What Changed
- Proposal to raise the small and non-complex bank asset threshold from €5 billion to €10 billion to cover ~150 additional banks.
- Mandate for European banks to submit action plans for AI-related cyber risks by the end of October.
- Reiteration that completing the EU Single Market and Banking Union is essential for competitiveness rather than relaxing Basel III standards.
Background
On 14 October 2026, Aloysius Widmann conducted an interview with Frank Elderson, Member of the Executive Board of the European Central Bank (ECB) and Vice-Chair of the Supervisory Board of the ECB. The interview, published on 20 October 2026, examines the ongoing balance between regulatory costs and banking system resilience within the European Union.
Addressing Regulatory Costs and Systemic Resilience
A central theme of the discussion is the cost of regulation faced by European banks. Elderson highlights that while banks frequently complain about regulatory burdens, the economic costs of the 2008 financial crisis far exceeded the expenses associated with current regulation. The 2008 crisis inflicted severe costs across households, firms, taxpayers, and society. Post-crisis regulatory reforms have significantly strengthened European banks, resulting in higher capitalisation, robust liquidity levels, and increased average profitability.
Elderson acknowledges that regulation and supervision have grown increasingly complex. This complexity stems from the diverse nature of banks and an environment characterized by intricate risks, including geopolitical tensions, cyber risks, climate and nature risks, and artificial intelligence (AI). However, he clarifies that simplification should not be confused with deregulation. The ECB has already taken measures to reduce reporting obligations and accelerate supervisory processes, emphasizing that resilience remains the prerequisite for sustainable economic growth and competitiveness.
Overcoming Market Fragmentation
According to Elderson, the primary obstacle to the international competitiveness of European banks is market fragmentation rather than regulatory stringency. Despite progress, Europe lacks a fully integrated, single banking market. Limited cross-border banking activities prevent institutions from taking full advantage of economies of scale, risk diversification, and efficient capital allocation.
To resolve these structural challenges, Elderson calls for completing the Single Market, the savings and investments union, and the banking union, including the establishment of a European deposit insurance scheme. Differences in national legal frameworks, insolvency regimes, and consumer protection rules create unnecessary costs for cross-border operations. Addressing these obstacles is necessary to enable banks to fund large-scale investments required for the climate crisis, nature preservation, energy transition, and demographic changes.
Adherence to International Basel Standards
Regarding global standards, Elderson warns against loosening the implementation of Basel III to gain a competitive edge. Because banking is an interconnected global industry, lowering regulatory standards would not eliminate underlying risks; rather, loosening Pillar 1 requirements would merely transfer the burden from regulation to supervision. Basel standards establish a common international minimum benchmark, allowing banks to compete on efficiency, innovation, and risk management rather than regulatory leniency.
Enhancing Proportionality in Supervision
While maintaining core prudential standards, Elderson strongly advocates for greater proportionality in supervision based on bank size, complexity, and risk profile. Currently, small and non-complex banks—which face significantly reduced reporting requirements (reporting up to 30% of the data required from large banks)—are defined by a total asset threshold of €5 billion.
Elderson proposes raising this asset threshold to €10 billion. Such an adjustment would bring approximately 150 additional banks under the simplified regulatory regime. Additional proposed measures to streamline supervision include:
- Lengthening the periods between regulatory reviews where risk profiles permit.
- Utilizing existing data more effectively for stress tests.
These changes aim to lighten the administrative burden on smaller institutions while freeing supervisory resources to focus on high-risk areas, without compromising safety, soundness, or core standards.
Supervisory Expectations for Artificial Intelligence and Non-Banks
The interview addresses emerging risks associated with transformative technologies and non-bank financial intermediation:
1. AI Cyber Risks and Deadlines: AI offers benefits in risk management and efficiency, but heightens cybersecurity vulnerabilities. In July 2026, the ECB instructed banks to reassess cybersecurity measures, IT budgets, and staffing levels, requiring concrete action plans for AI-related cyber risks by the end of October.
2. Operational and Model Dependencies: Banks must avoid over-reliance on AI algorithms, remaining watchful for algorithmic biases, data quality deficiencies, and concentration risks linked to a limited number of cloud service providers.
3. Non-Bank Interconnectedness: Market-based finance and private credit play a role in funding strategic priorities, such as the US AI investment boom. However, credit migrating outside traditional banking does not eliminate systemic risk. Interconnections—such as banks funding both private credit providers and their end-borrowers—can create hidden risk concentrations that require close supervisory scrutiny.
Frequently Asked Questions
Question 1: Why does the ECB oppose loosening Basel III standards as a tool for increasing European bank competitiveness?
Answer: Elderson emphasizes that banking is a global business with interconnected risks that cross borders. Lowering minimum capital standards does not eliminate risks; it merely shifts the burden from regulation to supervision. International Basel standards create a level playing field, ensuring banks compete on efficiency and risk management rather than operating under weaker rules.
Question 2: What specific threshold change is proposed to extend the simplified supervisory regime for smaller banks?
Answer: Elderson supports raising the total asset threshold for small and non-complex banks from €5 billion to €10 billion. This change would allow approximately 150 additional banks to qualify for simplified reporting and supervisory requirements.
Question 3: What specific action regarding artificial intelligence must banks take by the end of October?
Answer: Following the ECB's request in July 2026, banks must complete assessments of their cybersecurity measures, IT staffing levels, and IT budgets, and submit concrete action plans addressing AI-related cyber risks to the ECB by the end of October.
Question 4: How does market fragmentation impact European cross-border banking according to the interview?
Answer: Fragmentation caused by varying national legal frameworks, insolvency regimes, and consumer protection rules makes cross-border banking unnecessarily complex and costly. This prevents banks from achieving economies of scale, diversifying risk, and allocating capital efficiently across the European Union.
Who May Be Affected
European commercial banks, small and non-complex financial institutions, bank risk managers, and financial regulators across the EU.
Cross-Border Context
Applies across the European Union single market and addresses international competitiveness relative to global financial jurisdictions including the United States.
What to check next
- Monitor formal ECB and European Commission proposals regarding the €10 billion asset threshold for small and non-complex banks.
- Track upcoming end-of-October deadlines for bank submissions on AI-related cyber risk action plans.
This article provides general information and does not constitute legal advice. Consult the official text and obtain advice appropriate to your circumstances where needed.