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Elizabeth McCaul
Board Member

Innovation and banking supervision

Contribution by Elizabeth McCaul, Member of the Supervisory Board of the ECB, for Starling’s Compendium

13 June 2024

I consider it an honour to be asked to contribute to this annual compendium. In this Preamble, I would like to focus on two of the themes that have dominated banking supervision over the last year. First, the importance of delivering effective supervision that is intrusive, timely and efficient, especially where sound governance and strong risk culture are concerned. And second, continued technological investment and fostering a culture of innovation in an increasingly complex risk environment. The two themes share a link. Investment in innovation will be crucial for banks to build strong governance and risk cultures as well as for supervisors to continue delivering effective banking supervision.

Sound governance and strong risk culture

Bank failures in the United States and Switzerland last year demonstrated the importance of strong and intrusive supervision, and the need to act in way that is timely and forceful, escalating supervisory actions where warranted.[1] More than a decade ago, in the aftermath of the global financial crisis, the IMF observed that “Supervisors must be willing and empowered to take timely and effective action, to intrude on decision-making, to question common wisdom, and to take unpopular decisions.”[2]

This year, we are celebrating the tenth anniversary of the establishment of the Single Supervisory Mechanism (SSM). The SSM is the supervisory framework for the European banking union and includes supervisors working in the European Central Bank and 21 national competent authorities (NCAs). As we consider how to progress our supervisory activities after the first decade, we recognise that the inception of the SSM drove the development of key components of our supervisory processes. These include the need to break the “doom loop” between sovereigns and banks and create confidence in the banking system, with banks rebuilding their capital levels under a necessarily “capital-centric” supervisory process.

Today the banking system in Europe features a supervisory process respected worldwide and a resilient banking sector, thanks to reforms initiated in the wake of the global financial crisis leading to strong actions on the part of both bankers and supervisors. This resilience has proven enduring, even under significant stresses: the COVID-19 pandemic, significant disruptions to supply chains for energy and key manufacturing components in particular, rising interest rates aimed at defusing inflationary pressures, significant increases in geopolitical tensions including within Europe arising from Russia’s invasion of Ukraine, the risks of wider Middle East conflict presented by the Israel-Hamas war and concerns about tensions relating to China.

The supervisory process has not remained static during this first decade; it has constantly evolved in response to regulatory changes and emerging risks. In 2022, we asked a high-level group of external experts to review the effectiveness of our supervision.[3] This request was made with an eye to achieving greater effectiveness in the second decade and beyond rather than out of any existential concern. The findings were delivered in March 2023, before the bank failures in the United States and Switzerland. The expert group found that European banking supervision is effective and made recommendations about its continuing development. Presciently, the expert group suggested making greater use of the supervisory toolkit at our disposal, above and beyond the powerful tools we already had for setting capital requirements.

Building on their recommendations as well as our work and other learnings from recent events, we are currently revising our core supervisory process − the Supervisory Review and Evaluation Process (SREP) − so it remains fit for purpose and that our supervisory processes are more effective and efficient than ever.[4] We have six main objectives:

  1. Conducting more focused risk assessments, building on the multi-year approach introduced in 2023.
  2. Using the full supervisory toolkit available to us by law and moving up the escalation ladder when remediation of identified weaknesses proves insufficient.
  3. Enhancing communication by drafting more focused SREP decisions to clearly outline supervisory expectations and measures.
  4. Making methodologies more stable and, where possible, simpler and more transparent.
  5. Making better use of IT systems and analytics to enhance efficiency, access to data, risk analysis, consistency of decision-making and collaboration, as is explained in more detail later.
  6. Improving the integrated planning of the different supervisory activities, such as on-site inspections, targeted deep dives and horizontal thematic reviews, in order to maximise synergies and make our supervision more effective. One prime example, but certainly not the only one, is our work on bank governance and risk culture.

Governance is at the heart of supervision. It is a common saying in banking supervision that well-run banks do not fail. And it is true. Inadequate governance and risk management are a recurrent theme underpinning virtually all bank failures. The events of last year show how “intangible” non-financial risks can result in very tangible financial losses. Indeed, throughout my career, I have seen that strong governance is the true north guiding a sound bank, and hence a sound banking system.

Bank governance and risk culture are closely intertwined. Risk culture refers to the collective mindset and the shared set of norms, attitudes and behaviours related to the awareness, management and control of risks at all levels in a bank. This is what shapes the day-to-day decisions of management and staff and affects their risk-taking behaviour.

A strong tone from the top for an appropriate risk culture is set by leadership that builds, invests in and continuously, genuinely supports an environment where employees feel empowered to speak up, which encourages constructive criticism and challenge. The tone from the top is a crucial element in delivering on the right culture. But it is not the only one.

Risk Culture is supported by structures that enable it to flourish in an organisation. These structures are like the timbers that hold a house together in a storm. Strong policies and processes represent the key structures building a good risk culture within a bank. Policies creating appropriate incentives and establishing clear lines of accountability and ownership as well as necessary checks and balances, and processes promoting diversity of thought and a culture of effective challenge all immediately come to mind. But there is far more to it than that. A culture must also be reinforced by risk management, legal and human resources structures that are aligned, underpinning an overall governance framework at the supervisory and management body levels that is healthy. The structures that support the governance framework and risk culture need to be tested and monitored to determine whether they operate as intended and can withstand stress. And coherence across all elements is essential.

Effective supervision needs to be able to identify whether the good governance and risk culture that are vital for banks to successfully adapt to and effectively manage changes in risks in their operating environment are in place. Banking supervision needs to harness the benefits that technology can offer given the rapid rate of technological progress currently underway. Technological innovation can deliver the speed, scale and scope required to properly identify and address governance concerns in the banking sector. This is especially true where technological advances make it possible to sift through vast amounts of data, potentially making it possible to rapidly detect any misalignment between management expectations for a strong risk culture and reality. For example, by tracking relevant metrics such as the timing of the issuance of a draft audit report, the management response and the final audit report. Are the structures that frame the desired risk culture producing the expected outcomes? Gaining a faster, deeper understanding of any misalignment may allow for stronger, safer bank.

Bank governance and risk culture are one of the top priorities for ECB supervisors.[5] We aim to publish an updated guide to governance and risk culture, including examples of good practices, shortly.

Banking supervision and innovation

As supervisors, we are tasked with ensuring the financial stability of the banking system. Stability and innovation may seem like a contradiction in terms, but perhaps only if we remain at the surface. If we dig a bit deeper, I think what we need is (financial) stability driven by innovation.

The Italian writer Giuseppe Tomasi di Lampedusa tells us that things have to change if we want them to stay the same. Banking supervision and central banking will have to evolve if we want to continue delivering on our public mandate in this era of rapid technological change. This means embracing innovation while carefully managing the associated pitfalls and risks.

In a rapidly evolving world, we must match the pace of change. One of our objectives at the ECB is to harness the power of AI to make our supervisors’ jobs easier while remaining mindful of the related limits and risks. We aim to put our supervisors firmly in the driver’s seat, empowering them to apply supervisory judgement effectively in our revised supervisory process supported by innovation.

So how did we get started on our digital innovation journey?

In 2020, ECB Banking Supervision adopted a Digitalisation Blueprint[6] with a view to becoming a leading digital practitioner among banking supervisors around the globe. The blueprint is based on five key areas:

  • Delivering and hosting innovative systems and tools by providing a state-of-the-art supervisor toolkit
  • Developing a common IT landscape by moving to a modular IT architecture capable of hosting standard and advanced technology
  • Nurturing a global innovation ecosystem by actively engaging with academia, industry, start-ups and other authorities
  • Fostering a digital culture by equipping supervisors with the skills and mindset to innovate and fully engage in digitalisation
  • Running an advanced innovation model by leveraging synergies across the entire SSM through interoperable systems

The implementation of this blueprint has paid dividends that we enjoy today. We have deployed several cutting-edge suptech tools alongside a powerful set of core IT systems that are having a tangible impact on our supervisory work every single day.

We have rolled out suptech tools for use by both ECB staff and NCAs. Success was made possible by leveraging our diverse talents, adopting a user-centric approach and ensuring seamless collaboration, especially between colleagues on the IT side and supervisors within the ECB and the NCAs. The focus is on active collaboration rather than a top-down approach characterised by development of solutions that are distant from the end user.

While we enjoy some success, we are acutely aware that we cannot stand still. The volume of data created, captured, copied and consumed worldwide is growing at an unprecedented pace, and is expected to grow from tens to hundreds of zetabytes within a few years. At the same time, the banking sector is undergoing rapid change. Fintechs are entering the market. Traditional banks are adopting new business models incorporating fintech intermediaries in key business processes. And banks are pursuing innovation, deploying artificial intelligence in customer interfaces, data management and some credit processes. Meanwhile, supervisors are having to deal with increasing geopolitical risks and growing risks from the non-bank financial intermediation sector, together with the rising impact of social media on bank sentiment. To ensure efficient, effective and integrated supervision in this environment, our supervisors need to be able to exploit innovation to the full.

With this in mind, we recently adopted a new Digital Strategy for 2024-2028 setting out our vision of delivering “suptech at your fingertips”. It also sets forth a roadmap built on several components. First, it will enable us to assess how we can execute on our supervisory priorities given our current IT portfolio. Second, it embeds a principle of bringing together technology and people, promoting the implementation of both IT solutions supporting supervision and people-oriented initiatives such as staff upskilling. And third, it promotes the use of pioneering technologies such as generative AI to support specific supervisory processes. The overall goal of the strategy is to make advanced technology easily accessible to supervisors with just a few clicks.


Continuous investment in technology is key for ECB Banking Supervision to keep pace with changes in the banking landscape and to address emerging supervisory risks.

We need to deliver on our Digital Strategy in order to give our supervisors the best line of sight into risks and help them act promptly on our key supervisory priorities, such as governance and risk culture, in their day-to-day work. Successful implementation of the new Digital Strategy will enable the ECB to keep the European banking system safe and sound effectively and efficiently.

Investment in technological innovation has become an imperative, not only for the private sector but for public institutions as well.

*This contribution was published on Starling’s Compendium on 11 June

  1. Board of Governors of the Federal Reserve System (2023), Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank, 28 April, and Federal Deposit Insurance Corporation (2023), FDIC Releases Comprehensive Overview of Deposit Insurance System, Including Options for Deposit Insurance Reform, 1 May.

  2. International Monetary Fund (2010), “The Making of Good Supervision: Learning to Say ‘No’”, IMF staff position note, 18 May.

  3. ECB (2023), Assessment of the European Central Bank’s Supervisory Review and Evaluation Process, April.

  4. Buch, C. (2024), “Reforming the SREP: an important milestone towards more efficient and effective supervision in a new risk environment”, The Supervision Blog, ECB, 28 May.

  5. ECB Banking Supervision (2023), SSM supervisory priorities for 2024-2026, December.

  6. See McCaul, E. (2023), The SSM Digitalisation Blueprint, 29 June.


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