Interview with Milano Finanza

Interview with Claudia Buch, Chair of the Supervisory Board of the ECB, conducted by Francesco Ninfole

28 January 2026

Banks have had a few years of huge profits. Do you expect that their profitability has reached a peak, or could this change in the next months?

The situation of European banks looks good at the moment in terms of profitability and capitalisation. Non-performing loans on balance sheets are low. But we need to be very careful because there are a lot of uncertainties around us. Profitability is also driven by the macroeconomic environment, and no one knows how it will evolve. We do not forecast bank profitability. Markets currently expect some stabilisation.

Generally, we need to be very careful to project the good numbers that we are seeing now into the future. We are telling the banks that they need to be prudent in terms of their assessment of profitability and their capital planning. They should consider using the opportunity afforded to them now by good profitability to invest into their long-term resilience in terms of capitalisation, ICT and operational capability.

We are seeing in the banking sector a lot of new digital banks. Could these banks be a threat to the old way of banking? And also from the supervision point of view, could it be more difficult or at least different to supervise them?

Digitalisation brings more competition, new market entrants, new business models. Generally, in a market economy, we should appreciate competition. It is good for innovation. It can bring welfare benefits to consumers. But more competition can increase the incentives to take on more risks. This is why we are looking at this very carefully. In the euro area, there are over 50 digital banks, including new digital banks and pre-existing banks with newer digital brands. We need to make sure that they have sound risk governance, because many of these banks are growing very rapidly. Risk management needs to keep pace.

What are the risks and opportunities for the banking sector from digitalization?

Digitalisation can speed up payments and make them more efficient. We see many banks experimenting with artificial intelligence to speed up the provision of services and reduce manual tasks. This is all very much appreciated and welcome. But digital business models can be more exposed to cyberattacks. Cyberattacks have roughly doubled in recent years and they have become more intense. We work with the banks to ensure they have sufficient resilience against cyberattacks and can recover quickly after a potential attack. Many banks also outsource critical functions. With the new Digital Operational Resilience Act, we now have tools that improve the oversight of service providers to whom banks outsource. So we have good frameworks in place and we need to be highly vigilant because risks have increased.

Many see artificial intelligence as one of the most important drivers in the banking sector. But there could be a risk of relying too much on artificial intelligence and so to have, for example, bias in the lending processes. To what extent does AI really help the banks to improve in the provision of their services?

This is a key question. Routine tasks can now be done much more efficiently by artificial intelligence. But the core problem that banks are facing is that they have to address information asymmetries. They need to assess the credit quality of their borrowers and they need good forward-looking risk assessments. Here, the question is whether artificial intelligence is always a good tool for forward-looking risk analysis and whether it might introduce new biases into lending decisions. I do not think anybody has the full answer to these questions, but we are looking at this carefully. It is one of our priorities for the next three years. We want to better understand the impact of AI on banks’ efficiency and risks, and how AI helps them solve key forecasting and information problems.

How do you supervise this? Also with on-site inspections?

We begin by asking the banks where they use artificial intelligence tools. Around 90% of banks supervised by the ECB use AI to improve their services. The next step is to dig deeper into banks’ digitalisation strategies. As a supervisor, the next question is always: do banks have the right risk control frameworks around this? Would they, for example, detect biases in lending decisions?

While the new world of banking comes in, there is also the old one to consider. What are your expectations for NPLs and loan volumes with lower rates than before?

In the end it comes down to credit quality and the dynamics of lending patterns. Credit supply by banks is not currently constrained by capital requirements or supervision. European banks have ample capacity to lend. They have sufficient capital buffers. But uncertainty felt by corporates and households can lower the demand for loans.

In terms of non-performing loans, they are almost at the lowest levels in the past decade of banking union. We started with 7-8% of non-performing loans, and we are now down to roughly 2%. This is good. We do have some pockets – commercial real estate, SME lending – where we are seeing small increases in non-performing loans.

One reason for this relatively good performance of loan portfolios is that, even during the recent recessions, like those related to the pandemic and the energy crisis, there was quite a bit of fiscal support for households and firms. So we had recessions in the real economy, but they did not have a negative impact on banks’ loan portfolios.

This good performance may change. Effects of the new geopolitical risk situation and higher uncertainty have not yet reached banks’ balance sheets. Looking ahead, we are carefully assessing credit risk and banks’ lending practices.

What are you plans in credit supervision?

Underwriting standards are a leading indicator of potential future of non-performing loans. We have a project starting now where we first look at the data we already have on these standards. This year we will work very closely with the banks on this. Better information is beneficial for the industry because banks need to understand how market practices are evolving. So far, we don’t see a deterioration in the standards. But we also don’t have very good information, for example, on corporate lending standards. We need better data.

We will ask the banks to provide more information. We’re still in the process of setting the scope of this reporting because we understand that we need to be very streamlined and proportionate. We are looking at criteria like loan-to-value ratios or debt service-to-income ratios.

There could be some concern that the lending might be reduced.

No, it’s not really about the lending volumes. It’s about trying to understand whether underwriting standards are deteriorating, because based on past experience this signals that non-performing loans will increase.

Capital doesn’t seem a problem now. Do you have expectations about dividends and buybacks?

We do not decide on dividends or payouts. The banks do. But we look at the capital planning of the banks over a three-year time horizon. And we want the banks to take uncertainty into account.

Profitability of banks has increased and this is affecting the payouts to the shareholders – that is dividends and share buybacks. The aggregate payout ratio is 50-60% and the share of buybacks is roughly one-third. The banks need to weigh the legitimate interest of their shareholders in receiving payouts against the buffers that the banks want to have with regard to potential future risks.

If you had to rank the most important risks, what would you mention?

The two clear priorities for us are macro-financial and geopolitical risk, and operational resilience. Under these priorities, we have specific projects. One is to make sure that the banks are adequately capitalised and implementing Basel III. I also mentioned the project on credit underwriting standards. The banks have progressed a lot in terms of addressing climate and nature-related risk, but they still have work to do. The second bucket includes cyber resilience and remediation related to risk data aggregation. This is about whether the banks, the management and the boards have the right information to take informed decisions in a very difficult risk environment. We still see deficiencies there.

Could an escalation in tariffs also be a threat for banks in Europe?

Sure. Tariffs affect the financial soundness of corporates, which can in turn affect the banks. So far, we have not seen big impacts; the short-term impact has been relatively benign. But we do not know the medium to longer-term impact. This is one reason why, this year, we are asking the banks to undertake a reverse stress test and explain what adverse scenarios could affect specific business models. It will be very interesting to learn from this exercise where banks’ individual vulnerabilities are.

Are you satisfied with what banks are doing on cyber risk?

In 2024 we conducted a cyber resilience stress test where we asked banks what they would do if they were hit by a successful cyberattack, how long it would take them to recover their operations and how costly this would be. We found that, generally, the banks were prepared and had recovery mechanisms in place. But we also found areas for improvement in individual banks and identified good practices that we could share with other banks. We continue to work with the banks and identify deficiencies because, if a cyberattack is successful, banks cannot provide their services, and that has reputational and financial effects.

Competitiveness has been a key topic. How do you see it, and what can the ECB do?

Competitiveness is clearly important for individual banks. At the system level, it is less well defined. Our role is to ensure that clear rules apply, that there is good cooperation across supervisors and that our own operations are streamlined. The idea that an entire banking system or marketplace competes against another one is a bit of a false analogy. What we need internationally is not competition between marketplaces, but global cooperation. We need to make sure that we address financial stability risk at the global level.

If you zoom in on individual institutions, you can see that well-capitalised banks are more competitive because they can continue lending and servicing their clients in difficult times as well. The competitiveness of a bank depends on its capitalisation, the soundness of its business model, and its efficiency and resilience.

ECB is committed in simplifying rules, as shown in the recommendations of the High-Level Task Force. What are the priorities here? How do you respond to market concern about possible changes to Additional Tier 1 securities?

Additional Tier 1 instruments are securities that can be converted into equities in the event that losses need to be absorbed. But these instruments can have complex features and triggers. The high-level task force suggested assessing whether these instruments can be made less complex to improve their loss absorbing capacity. These were high-level recommendations to the European Commission. Potential concerns would of course be taken into consideration in a potential future legislative process.

The ECB has always been in favour of consolidation, including at cross-border level. What kind of consolidation do you expect?

Generally, the very reason we are here – the ECB, the banking union, the Single Supervisory Mechanism – is to integrate the European market. Some indicators of integration, including cross-border mergers and acquisitions, have declined over the past few years. And if we compare the last decade with the one before, integration has not progressed much.

From a supervisory perspective, we do not have a vision of what the market should look like in five or ten years’ time in terms of consolidation. These are decisions that market participants have to take. Increased digitalisation of financial services, for example, opens up new opportunities. It would be good if barriers to integration were removed so that these opportunities can be used and banks can scale up. This would improve efficiency and competitiveness. Our role is to make sure that there is no undue risk taking, that good governance frameworks are in place and that prudential ratios are met, for both domestic and cross-border mergers.

So you are looking at prudential indicators and not at borders between countries?

Yes, exactly. We have a prudential perspective and, because we are in the banking union, borders do not matter to us. We assess domestic mergers using the same criteria as for cross-border mergers.

Should governments have a say in mergers?

The idea of the banking union is to make sure that borders do not matter, in the sense that the same prudential standards apply across countries and that market integration is promoted. This should also be in the interest of governments. We’re in a single market. We have clear rules on merger activity that address prudential and competition concerns. These are the rules that the co-legislators have given to us and the competition authorities.

After years of discussion, a true banking union still seems distant. What can be done to accelerate progress?

I would not diminish the progress that has been made. We have the Single Supervisory Mechanism and the Single Resolution Board. The big missing element is European deposit insurance. I hope political leaders will make further progress on this project because it is a natural complement to European supervision. We are working for the savers to make sure that banks are safe and sound. European deposit insurance is the natural next step.

Some banks fear the digital euro and they are concerned about the impact on liquidity and fees. What are the consequences of the digital euro for banks?

Banks should not fear the digital euro. Quite the contrary. The digital euro is conceptualised as supporting banks’ digital business models. It is a response to the digitalisation of payments. It is important that the currency provided by a central bank is also available in digital form. There has been a lot of interaction between the central banking side of the ECB and the banks to understand their digital business models and their role in the digital euro project. The digital euro is a facilitator, an enabler of banks’ digital business models rather than a threat. The costs for banks would be manageable compared with typical IT budgets. Purely private sector solutions provided by non-banks could in fact be more of a competitive threat to incumbent banks.

What is your view on the possibility of further postponement of some market rules of Basel III (FRTB) beyond 2027, considering delays on this matter in the US

Europe should continue on its path to implementing Basel III. It is important that we have global standards and safeguards. Banks do not currently have difficulties meeting the capital requirements of the new Basel III regime.

Market risk has clearly increased, so it is important to have strong guardrails. Few banks are affected by the FRTB, and overall the potential increase in capital requirements appears manageable because market risk-weighted assets are a small share of overall risk-weighted assets. We support the proposal that the European Commission recently published for consultation, whereby the FRTB would enter into force in the EU on 1 January 2027. It is important for the banks to have clarity on what the framework is. The longer they have to work with two different systems to compute their capital requirement for market risk, the more expensive it is.

On securitization, are you satisfied with the agreement that has been reached on the Eu Council?

We have a project that aims to speed up the approval process for securitisations with significant risk transfer, while keeping the same standards of resilience as before.

But securitisation is not riskless, as we saw during the global financial crisis. We would thus have concerns if prudential standards were lowered. Underwriters need incentives to monitor underlying risks. Synthetic securitisations in particular can create risks to financial stability if risks move outside the banking sector and come back in difficult times. We need more information to understand these risks, and we will focus our attention on complex, risky structures with potentially negative implications for financial stability.

What are your objectives of your visit to Italy, and what is your assessment of Italian banks?

Many of the things I said about the European banking sector also hold for Italian banks, like the good profitability and capitalisation. Non-performing loans have declined significantly. They are still a bit higher than the euro area as a whole, but the overall picture is favourable.

At the same time, there is uncertainty about what the future might bring and how geopolitical risks might play out. This is not specific to Italy – it’s a general story. Markets have a benign risk assessment and are not pricing in geopolitical risks. Banks need to find ways to deal with this uncertainty and remain resilient.

During country visits, I meet the national supervisors, civil society and banks. We work very closely with national authorities. For example, around 80-90% of our on-site inspectors come from national competent authorities like the Banca d’Italia.

What is your overall assessment of your first two years as Chair of the ECB Supervisory Board?

Very positive. The environment has changed significantly in terms of the risk landscape and the discussion around competitiveness. Our teams – both at the ECB and at national level –have responded to these challenges in a very productive way. We have a framework for addressing geopolitical risk. We have a reform agenda for streamlining supervision and safeguarding resilience. Times have not become easier, so we need to keep up this spirit. We have a project on supervisory culture to change how we do things and become even more agile. It’s very good to see that the Supervisory Board is fully committed to this work.