Balancing diversity and stability in European banking supervision

Article by Patrick Montagner, Member of the Supervisory Board of the ECB, for Eurofi Magazine

Warsaw, 8 April 2025

The European banking system has continuously evolved, with diverse business models emerging to meet particular economic and social needs. From mutual banks established to support specific communities to modern digital challengers addressing new consumer preferences, this diversity reflects the needs of EU consumers and our economic history. The creation of European banking supervision in 2014 was a crucial milestone in establishing a common supervisory approach that respects this historical diversity while ensuring that prudential standards are applied consistently.

Today, the ECB directly supervises 114 significant institutions across 21 countries, which form a rich ecosystem of banking models.^[1] They include global systemically important banks (two of which are mutual groups) as well as domestic lenders, universal banks, sectoral and diversified lenders and more specialised institutions. This diversity strengthens the resilience of the financial system by reducing the correlation of risks at the macro level, yet it also requires sophisticated supervisory approaches. The design of our supervisory framework is particularly relevant in this context, as it addresses the issue of proportionality. The ECB focuses on significant institutions while national competent authorities supervise less significant institutions, ensuring that the intensity of supervision matches the complexity and systemic importance of each institution.

The ECB’s supervisory philosophy is neutral towards business models – any differential treatment stems from banks’ risk profiles and complexity, not from their legal form or specific business models.^[2] This principle is embedded in our Supervisory Review and Evaluation Process (SREP), where business model analysis plays a central role.^[3] Supervisors assess profitability drivers and key ratios based on long-term viability. They evaluate governance structures with an understanding of the differences between cooperative banks and commercial banks, and they compare banks against relevant peers.

The ECB is placing greater emphasis on the unique characteristics of specific business lines, individual banks and clusters of banks to better identify patterns or issues that require tailored supervisory actions. This proactive approach aims to develop supervisory strategies to address vulnerabilities at an early stage, potentially including escalation measures.

As announced in May 2024, recent reforms to the SREP methodology demonstrate our commitment to enhancing the effectiveness and proportionality of our supervisory approach.^[4] The revised framework has brought several improvements to the way we assess business models. The new methodology introduces a more structured assessment of banks’ forward-looking strategies and their ability to implement these strategies. It also enhances proportionality, simplifying internal reporting for smaller banks.

The banking sector is facing transformative challenges that require close attention from supervisors. The need for enhanced IT systems is requiring substantial investments in technology while creating new operational risks. Banks need to significantly modernise their IT infrastructures, which are often burdened by legacy systems, in order to meet customers’ evolving expectations for banking services, adapt to demographic shifts, enhance security and improve efficiency by reducing production costs. The Digital Operational Resilience Act is an important step in addressing some of these challenges, but questions remain about how to ensure a level playing field between banks and technology-focused competitors that are willing to enter some of the traditional banking activities. In the EU, only a few – often relatively new – institutions have managed to create fully integrated platforms for some business areas to address these IT and data challenges.

Market integration is another key consideration. Reducing system frictions can lead to more integrated EU banking groups, fostering competition, improved customer service and innovation. This requires strong governance and comprehensive risk management, which should be implemented effectively in both parent entities and their subsidiaries.

Overall, European banking supervision must balance the benefits of diversity with the need to ensure a level playing field. We need to maintain the integrity of the Single Rulebook, but we should also allow for a variety of business models, ensure that requirements are applied proportionately and support innovation while managing the associated risks. Success in these areas will be key to ensuring that the European banking sector remains competitive while serving the diverse needs of the European economy.