Interview with Patrick Montagner

Interview with Patrick Montagner, conducted by Revue Banque on 7 May 2025

28 May 2025

Simplification is the current buzzword. From a supervisor’s perspective, where do you feel there might be room for simplifying things?

First of all, it’s important to stress that the ECB is not responsible for legislation; that’s the legislator’s domain. We are there to enforce the rules, but it’s not always easy. It’s therefore important that we can ask ourselves questions about how we go about things and communicate with the third parties involved in supervision.

That’s why Andrea Enria, Claudia Buch’s predecessor as Chair of the Supervisory Board of the European Central Bank, commissioned a group of four independent experts to critically assess our approach and identify what could be improved.

The report acknowledges the ECB’s huge achievement of establishing clear standards. But this has come at a cost in terms of burdensome internal procedures and supervisory dialogue with third-party entities, like the national authorities.

It also recommends focusing the supervisory process more on analysing risks and less on complying with rigid, procedural constraints. The underlying idea is for the supervisor to have more confidence in themselves and their expert judgement.

Claudia Buch decided to implement the report's recommendations, at least partly.

The Supervisory Review and Evaluation Process (SREP), which forms the cornerstone of banking supervision, is primarily affected by the changes envisaged.

In concrete terms, and exempting those banks with very high-risk exposure, this would mean asking only for information about specific risks identified for each institution and no longer asking for information relating to all risks every single time the SREP is performed. This would reduce the workload for banks.

The SREP’s timeline was also called into question. Previously, banks would only receive a decision and remedial measures to be taken one year after the SREP had been completed and once the next SREP had started. The process was too long. It was therefore decided to shorten its duration and adopt a multi-year approach within it.

During the SREP, there are 114 teams involved. They don’t each need to reinvent the supervisory process, but it can be useful to give them some flexibility and let them exercise their expert judgement. Rather than adhering strictly to rigid procedures, the aim is to trust their intelligence.

This change to the SREP is only the beginning; it’s the first stone, but a cornerstone..

You say that the SREP reforms are only the beginning of this simplification process. What will the next step be?

The ECB is still working on this. In particular, we are looking at the micro-processes relating to all of the checks carried out on an ongoing basis. Several in-house working groups have been set up for this purpose.

A task force to be overseen by Luis de Guindos, Vice-President of the ECB, has just been formed. It will be responsible for making proposals and coming up with ideas for this simplification process. It comprises five experts: François Villeroy de Galhau, Governor of the Banque de France, Joachim Nagel, President of the Deutsche Bundesbank, Fabio Panetta, Governor of the Banca d’Italia, Olli Rehn, Governor of Suomen Pankki and Vice-Chair of the European Systemic Risk Board, and Sharon Donnery, Member of the Supervisory Board of the ECB.

The task force’s findings will be included in a high-level report containing specific proposals for the ECB on how to improve the supervisory approach.

The press has reported on a difference in the approaches taken by the Governing Council and the Supervisory Board, referring sometimes to “tension” regarding this simplification process. Are they justified in using this term?

This task force has just been created. Full alignment within the ECB is crucial, because it would be institutionally impossible to have differences of opinion between the Governing Council, which is the main decision-making body of the ECB, and the other boards. We are all working towards the same goal, which is to achieve simplification without endangering the regulation or stability of the financial system.

The ECB’s mandate is centred on the overriding objective of financial stability. It must not be jeopardised, it’s fundamental.

We are all well aware of how costly it can be if the financial system is destabilised. Banks must retain their ability to manage periods of stress. Banking crises have a severe impact on the economy, and the subsequent recovery is very long. Banks need to be able to continue lending; today’s economies rely on their being able to do so. Economies remain sustainable because banks are able to deal with these episodes of stress. As Luis de Guindos recently reiterated in an interview, this is a fundamental principle; the ECB, and the Governing Council in particular, have always been very clear on this.

Major changes are taking place in the United States. Today, there is a kind of mantra that says, “simplification does not mean deregulation”. Nevertheless, there is talk in many circles of a potential over-regulation of the sector in Europe...

I don’t agree with the idea that Europe is over-regulated. If we’re talking about turning the clock back to how things were before, around 15 years ago, it would be a disaster. Just because the United States is lowering its standards doesn’t mean that we have to do the same.

We should be wary of the deregulation trend; weakening prudential rules always comes with a price tag in the long run. Studies show that each time these rules have been relaxed, it has ended in a major crisis in the US banking system, resulting in federal government intervention, as was the case in the 1980s and 2000s. The crises that small to medium-sized banks in the United States went through in 2023, in addition to the Credit Suisse crisis, provide us with some clarity: European banks came out the other side unscathed precisely because they were sufficiently prepared to deal with this type of situation.

A consultation has been launched in Europe on the Fundamental Review of the Trading Book (FRTB) and its application, scheduled for January 2025, has been postponed. Both the United States and the United Kingdom have put its implementation on hold, with a review scheduled to take place in 2027. In Europe today there is talk of maintaining and of postponing it. Some suggest doing the same as the United States or the United Kingdom.

The FRTB applies first and foremost to market trading activities – which are essential for ensuring the economy operates properly – and has an impact on international banks. Though very specific, they are essential activities. Large firms need banks for hedging against certain risks, such as exchange rate or oil price fluctuations. If the FRTB penalises these activities, this could put banks operating in this sector at a disadvantage.

That’s why the European Commission has launched a consultation, and the ECB has issued an opinion on the subject on 7 May. All jurisdictions, including the United States, had implemented a plan for 2025, everyone was working towards that. In my opinion, it would have been best to uphold the agreement signed in Basel in 2019.

As far as Basel III is concerned, some financial stakeholders are calling for certain requirements, such as those relating to capital, securitisation and calculation methods, to be scaled back. What do supervisors think about this?

Regarding capital requirements, the main debate today concerns the FRTB. The other requirements have already been implemented in the United States and elsewhere, and there is no need to review them.

Numerous stakeholders in European banking are currently calling for the EU securitisation framework to be simplified. For its part, the ECB is working on improving the existing framework. It is trying, for example, to streamline the process for obtaining prior approval for significant risk transfer.

Banks are asking for something that goes beyond the current legislation. They want a more favourable framework for securitisation because they feel that the bulk of credit granted to the economy in Europe is weighing on bank balance sheets.

In the United States, a large portion of financing is conducted off-balance sheet or securitised immediately. US banks are more agile in this respect. To finance new flows [of capital] – for Europe’s rearmament or the energy transition, for example – European institutions would like to be able to sell the loans already granted under secure conditions for investors, who are often their end clients.

They are therefore calling for a simpler and more broadly applicable supervisory framework to ease the current capital requirements. The aim is to free up space on their balance sheets for new loans. The ECB shares this goal, but the details still have to be ironed out. And, as the saying goes, the devil is in the detail. We will have to see what this will actually mean in concrete terms, because anything that weakens prudential rules on a long-term basis will have an impact at one point or another.

In an interview in June’s Revue Banque supplement, on the subject of single supervision of the markets, Stéphane Giordano commented that it had been announced that banking supervision would cost less, but this doesn’t seem to have been the case.

Supervision at European level is organised according to the principle of a federal system. It is based on an overall harmonisation of the applicable rules. Nevertheless, it’s important that the supervisory bodies at national level can fulfil their mandate and take specific national characteristics into account. This harmonisation aims to ensure that the general rules are applied effectively and efficiently, but it does not seek to reduce fees in any way.

There is one thing I can be very clear about, and that is that we have never claimed that single supervision would be cheaper in terms of fees. Everyone knew that it would cost more because it implied an additional layer of supervision.

But what banks were hoping for was to put an end to absurd situations. For example, if you were operating in France and Belgium, you might have two national supervisors, with each applying the same European rules but in different ways. The aim was to harmonise this, not make savings. The goal was to no longer have around 20 supervisors, with each only partially applying the Capital Requirements unDirective according to different criteria and based on their national rules. We wanted to operate on the basis of increasingly integrated regulations.

But the system is still federal, of course: there is a European level, represented by the ECB, and a national level. So it was clear from the start that banks would have to pay towards the cost of European banking supervision as well as the national level. It is completely untrue to say that it was sold to them as a cheaper solution. What they have been sold is more effective, consistent and foreseeable supervision.

We can, however, talk about the fact that what was promised was not fully delivered: there are still some difficulties in linking macroprudential policy with microprudential supervision at the national level. Home bias is still a problem in some Member States. Not everything has been fully standardised.

This debate is still ongoing in the financial markets. Some thought is being given to single supervision, but it’s focused on certain systemic players, particularly central counterparties and central securities depositaries. Here too, the idea is to simplify and centralise, not make savings. But this is outside the ECB’s authority and falls under the European Securities and Market Authority’s purview.

Are European banks too small compared with US banks, and does this pose a problem?

I don’t think European banks are necessarily too small compared with US ones. The problem stems more from the nature of the European market. US banks benefit from a vast, unified market, which is not the case in Europe.

In the United States, when a bank like JP Morgan interacts with consumers, whether they’re in Texas or Maine, it does so in the same language and under relatively uniform regulations. In Europe, retail banks have to cater to Germans, Italians, Spaniards and Lithuanians, for example, which means adapting to a range of consumption habits. Some countries prefer variable-rate mortgages, while others prefer fixed-rate ones, which can be renegotiated after a certain period of time.

Some banking products might need to be completely redefined depending on the country in question. Additionally, national case law and collateral rights differ, which is an obstacle to a unified European banking market.

Finally, European banks primarily offer cross-border services to medium-sized and large enterprises. These services are often offered to households through local subsidiaries or not at all if the market is deemed too challenging to enter.

European banks don’t really have the capacity to operate in an integrated market of 300 million people, even though the potential is there.

US banks tend to have higher levels of profitability, but it’s uncertain whether European consumers would be willing to pay as much for banking services as their US counterparts.

From a supervisory perspective, what, as things currently stand, are the real drivers of competitiveness for European banks?

European banks need to put real effort into boosting their efficiency.

US banks are much more profitable, and profitability is the first line of defence against losses in the event of a crisis, whether due to increased cost of credit or risk. It allows banks to absorb losses fully or at least partially, before having to resort to dipping into their capital reserves.

Efficiency primarily lies in the service provided to customers and how they perceive it. Customers expect efficient services, like instant credit transfers, which requires substantial investment. Banking platforms must be user-friendly and easy to use, which also requires investment.

That’s why it’s essential to have well-functioning IT systems.

At present, institutions are layering IT systems on top of one another, which isn’t always optimal. All of this increases banks’ operating costs.

Digital operational resilience and digital transformation are among the ECB’s supervisory priorities. You refer to “deficiencies” in this area. What are they?

The deficiencies identified relate mainly to banks’ IT systems: they are not up to standard. New technologies are often added on top of outdated ones, resulting in a layering of computer systems that makes updates even more complex and means that a great deal of effort is required to keep systems stable.

To give an example, a large banking group recently took the time to look into upgrading its IT system. Although more robust, reliable, cost-effective and better for data aggregation and availability, switching over to a new system is challenging.

Protection against operational risks and cyber threats is becoming crucial, and effective operational resilience frameworks are essential.

This extends beyond simply having enough capital; it requires having IT systems that can withstand crises. For example, during a widespread power outage, vital systems must continue to operate, even if some services like ATMs are temporarily down, to ensure continuity in banking operations.

This is where the Digital Operational Resilience Act (DORA) comes into play. Though complex, it marks significant progress. With DORA, penetration tests can be performed on systems to assess their robustness. Although this type of testing existed before, it required prior consent from institutions, which was not always a given.

Each change or addition, such as a new application, can introduce vulnerabilities. Some major banks in the UK have experienced outages that halted all transactions due to IT glitches, to the extent that a parliamentary inquiry on bank outages is currently being carried out by the House of Commons Treasury Select Committee.^[1] It just goes to show how important these tests are: these aren’t unfounded fears, but concrete problems encountered on a daily basis.

As far as competitiveness is concerned, do you think the ECB will end up issuing opinions on an even larger number of bank mergers?

It’s true that consolidation is occurring across several domestic markets in Europe, including Spain, Italy and Germany. For instance, a large French bank wants to double its size in Germany through an acquisition, and a large Italian bank, already well established in Germany, might be considering a similar move. The banks themselves have made their intentions public. Currently, there are a number of potential consolidations that could strengthen domestic markets which still seem fragmented compared with others. Some of these will come to fruition, while others won’t.

In these cases, the ECB is asked to green light the transaction, which it does based on purely objective criteria, without being swayed by speculation. We assess whether the business model presented is viable both before and after the acquisition, i.e. whether the new entity is as robust as the two separate ones, and if it is sustainable in the medium term.

On the subject of these mergers, there’s considerable debate about use of the “Danish compromise”. Some French entities have tried to make acquisitions using their insurance arm, but the ECB was against applying the compromise. Economic stakeholders are seeking clarity on this matter. What’s the ECB’s stance?

Here, you’re referring to a specific case, i.e. a bank looking to expand its operations beyond banking into areas like insurance or asset management. In EU financial jargon, this is called a financial conglomerate. The Danish compromise, which has been around for a long time and is actually a regulatory provision, allows banks to apply a risk weight to their equity stake in an insurance company rather than deduct it fully from Common Equity Tier 1 capital. This is based on the fact that insurance companies are already supervised and subject to their own regulations.

The ECB oversees application of this compromise. The question that needs to be asked is whether an insurance company can still benefit from this compromise at the level of its bank parent company when it makes an acquisition outside of its core sector.

In two specific cases made public by the banks involved, the ECB stated that the Danish compromise could not be applied to any activities other than insurance in the strictest sense. If other cases arise, the ECB will assess the situation accordingly. If the European Banking Authority changes its stance on the Danish compromise in the future, the ECB will follow its guidance. For the time being, the ECB maintains its position on the two specific cases that were presented to it.

Earlier, you mentioned aggregated and accurate data. Data aggregation and reporting are also part of the supervisory priorities, and again, “deficiencies” have been identified. Could you tell us more about this?

Nowadays, banks need to be able to consolidate and analyse their data clearly and accurately, and in real time.

For multinational groups, this task becomes particularly complex. Imagine that the bank’s parent company is in Paris, with subsidiaries in Italy and Tokyo. They grant loans to the same group. All data related to this client group, whether from its own entities or the bank’s subsidiaries, must be able to be consolidated.

The same applies to market trading activities and counterparty risks. For example, if a bank hedges interest rate risks for a large airline while granting it loans, it must be able to centralise these data. Similarly, ensuring that market trading activities are settled in real time is essential to avoid unmonitored positions.

Real-time aggregation is crucial; if the data arrive one month late, they become useless, as the problems have already occurred.

Consolidating group-level data is a complex task, especially when they are processed by different IT systems.

Although these vulnerabilities have been known about for a long time – the ECB has been flagging them for years – they often remain inadequately addressed.

Moreover, this isn’t a problem exclusive to the banking sector. Speaking from previous experience, supervisors in the insurance sector had the same concern. The quality of data has improved, but it is still a cause for concern which affects the quality of risk management policies.

Data-related issues are probably even more critical when it comes to climate risks, aren’t they?

It’s fair to say that climate and environmental risks can’t be ignored any longer because they will both directly and indirectly affect bank activities. The ECB is heavily involved in this area. This isn’t about activism or following the latest trend – the scientific consensus, particularly from the Intergovernmental Panel on Climate Change, expects these risks to intensify. The recent report on natural disasters published by a major international reinsurer clearly highlights this trend^[2].

Every environmental risk ultimately becomes an economic risk. For example, financing the agricultural sector in regions prone to severe drought poses a risk. Home loans can be affected by risks associated with the swelling and shrinking of clay soils, which causes cracks in buildings that aren’t covered by insurance. During the floods in Germany, Belgium and the Netherlands, many residents were uninsured.

These risks can affect the banking book. Banks need to identify and carefully analyse these risks and take them into consideration. We are at the beginning of this process, and uncertainties remain. But it’s crucial that banks start down this path and begin charting a clear course for the future.

Let’s talk again about traditional risks. The economic environment is a key factor. How are you assessing credit risk today? Is it the main risk that you are focusing on?

By definition, any risk ultimately translates into credit risk. An environmental risk can lead to an increase in payment defaults and a reduction in collateral. A geopolitical risk, such as those related to the war in Ukraine, affects economic sectors and turns into credit risk.

Currently, the macroeconomic environment isn’t bad, although we need to remain vigilant. For the time being, there is no recession or huge economic shock. However, threats such as tariffs on imported goods could affect certain sectors. This could potentially translate into an increase in credit risk. For now, this is not what we are seeing.

The new accounting standards have introduced more prudence in provisioning, making banks more resilient to credit cycles. Today, we are facing very weak growth, which could lead to payment defaults by certain firms and households.

However, we are not currently expecting a massive wave of defaults, unless an unprecedented event were to occur. Banks are well-capitalised and have the capacity to cope with a potential increase in credit risk.

The 2025 stress tests will undoubtedly provide more information on this topic. These stress tests will allow us to assess banks in the face of deteriorated or even severely deteriorated geopolitical scenarios. We are only at the beginning of the process, and the initial findings still need to be assessed. But this will allow us to identify the areas where weaknesses exist so that we can address them.

We have not yet discussed the ongoing legislative process relating to the review of the crisis management and deposit insurance (CMDI) framework and the procedures for resolving medium-sized banks. Some Member States are opposed to the creation of a European deposit insurance scheme. What is the supervisory viewpoint on this issue?

The aim of these rules, particularly on the European deposit insurance scheme (EDIS), is to break the link between a country’s sovereign debt and its national deposit guarantee fund. Currently, if a bank fails in a country, the national guarantee fund in that country intervenes, meaning that the local taxpayer ultimately foots the bill. This creates a link between the sovereign debt issuer and the safety and security of the banking system, which acts as an obstacle to a unified banking market.

The CMDI framework acts as an intermediary between supervisory and resolution authorities until full resolution is achieved. The aim is to determine which tools can be used, for example whether deposit guarantee funds can provide temporary relief rather than only in the event of failure.

It is common knowledge that two major Member States have opposed these proposals, but for diametrically opposing reasons. They have radically different points of view.

The ECB is in favour of seeing these proposals completed and adopted. Europe only tends to harmonise after a crisis, but it is better to do so during more stable periods. You don’t rearm during a war, you prepare beforehand.

For the time being, banks are well-capitalised and profitable, so the European banking sector is not at risk. The banks demonstrated their stability during the 2023 crises that hit US banks and Credit Suisse. So, it is the perfect time to move forward with these proposals, because if a problem were to occur tomorrow, we would have a toolkit at the ready to act appropriately.

From a political perspective, given the recent environment, are you seeing an increase in a European approach when it comes to trade, or are pro-national approaches gaining traction?

I don’t think that Member States are divided when it comes to the end goal of financial supervision. Everyone remembers how difficult it is to deal with a banking crisis and how it can put several countries at risk, as was the case in 2008 with Ireland, Greece, Spain, Italy and even Germany. All of these countries suffered a lot, and the cost of a banking crisis is very high.

Differences can occur in terms of the approach to take, because the structure of national banking systems is not the same across the board.

For example, a Member State where large local banks are mainly the subsidiaries of other Member States will not have the same perspective as a country with a highly fragmented banking landscape. This doesn’t mean that the end goal differs, but the approach taken may vary depending on national perceptions.

I wouldn’t say that there is a rise in nationalism when it comes to banking supervision. There may be different points of view on what guarantees the stability of each market when looked at in isolation. What might sometimes be lacking is a common vision on the stability of the whole banking sector.

In short, there may be different views on how to protect a national banking system when looked at in isolation, but there is no rise in nationalism. The end goal remains the same, and our dialogue focuses on the means we can use to achieve this, with some further adjustments to be made.