Interview with the Business Post

Interview with Sharon Donnery, Member of the Supervisory Board of the ECB, conducted by Sarah Collins on 29 January 2026

9 February 2026

What are the big geopolitical risks that you see for the banking sector, in the context of last week’s speech in Davos by Mark Carney, the Canadian Prime Minister, about there being a rupture in the global order? What risks could there be for the EU banking sector and the wider economy?

The first thing to say is, from our point of view as banking supervisors, geopolitical risk is not new. If you go back many years, many decades, there have been geopolitical risks. And we’re still looking at banks’ core business: credit risk, liquidity risk, operational risk and so on.

But in recent years, we’ve seen heightened geopolitical risk and heightened levels of uncertainty. When we think about geopolitical risk, we are trying to think about what could happen that will either manifest itself through economic shocks – such as trade tariffs, disruption in financial markets, like last year – or more operational things like cyberattacks. We’re trying to think about how the broader geopolitical environment can manifest itself through these channels onto the banks.

It’s been on our agenda for the last couple of years, because the world is clearly shifting in terms of trade. We’ve also had the horrendous situation with the war in Ukraine on our own borders and global tensions that are leading to state-sponsored cyberattacks and the like. So it has caused us to put more focus on geopolitical risk.

Our stress test last year was already looking at geopolitical risk, and it particularly focused on the possibility of trade tensions. It showed that, broadly speaking, the banking sector was resilient. And that shows the resilience which has been built up over the past years. The stress test gave banks a single scenario and they were asked to assess how that would affect their business.

This year we are conducting a reverse stress test, which looks more at the differences between the banks. Banks have different business models, different country exposures, different currency exposures, different customer bases. They may be large international groups or they may be more locally, domestically focused. So the idea of our reverse stress test is to ask banks to look specifically at their business model, their exposures, their country of operations, their structures and the geopolitical risks they’re exposed to. Banks then pick the most severe scenarios that would cause a significant capital depletion of 300 basis points.

We want banks to use the reverse stress test to look at their whole internal approach to scenario planning, to thinking about how geopolitical risk might affect them. What does their board know about this? How do they operate in the current environment? We’ll get all of this information. We look at the individual bank findings and we may of course have things we want individual banks to look at or to address.

We will also try to look at the broader banking system in terms of its exposures. We don’t know the answer yet. And then in the summertime, we’ll publish an overview or a report.

On your point about the international order, it’s very hard to predict what the next big thing that might trigger a shock or cause an issue is going to be, and that’s one of the challenges for banks. In fairness to the banks, it’s also one of the challenges for us now as supervisors, and the prevailing level of uncertainty will be the concern. So it's hard to pick one particular thing, and whatever it is, it might affect individual banks differently.

There was a Deutsche Bank note last week about the idea of dumping USD 8 trillion worth of US bonds that European investors have and that they could potentially sell off. Is that one of the risks or threats you see? And how would that affect European banks and the European economy?

We try to look at all sorts of country and currency exposures to understand banks’ risk exposures. There’s ebb and flow as different things happen globally. So we would continually monitor sovereign exposures and currency exposure. It is something that we look at and discuss with the banks all the time.

One of the issues with an event like that, if there were to be a single trigger that caused a huge disruption in some particular market – everybody selling at the same time, for example – is that it affects everybody at the same time. We have to look at the risks of market disruption, and that’s why I mentioned that one of the channels of geopolitical disruption that we look at is this idea of disruption in financial markets, which happened at the time of the trade announcement last year.

Is the US dollar’s weakness against the euro something that would leave the European economy exposed, in your view? I was reading some comments by the German chancellor, where he was talking about German exports, particularly small and medium-sized enterprises (SMEs), being really squeezed by the strength of the euro.

As banking supervisors, we don’t forecast exchange rates. We obviously look at the exchange rate exposure of the banks, and we do monitor whether exchange rate issues, for example, may put the SME sector or the corporate sector under more stress.

But as I said, based on the work that we’ve done over the past years, including the stress test last year which looked at trade and disruptions to the macro economy, the banking sector has proved broadly resilient.

If we look at credit conditions, non-performing loans and the like, we’ve obviously seen a huge reduction since the peak of the 2008 financial crisis. We do see some small pockets, in some individual countries, or in some sub-sectors of the SME sector, where maybe there’s a small increase in non-performing loans. For those risks that you mentioned, we look at the credit conditions and whether banks are actually exposed to the potential for non-performing loans. So that whole area of credit risk is something that, as supervisors, we look at all the time.

Is there a link between these non-performing loans and the trade tensions? Has it happened in the last 12 months?

Yes, it’s happened in the last 12 or 18 months. I wouldn't say it’s particularly about trade tensions. It’s more broad, macroeconomic issues. I don’t think we have a one-to-one link with anything particular that has happened.

There’s also still some legacy of things from the pandemic and supply chains and the like, and there’s a lag between something happening and it potentially causing credit distress. And I wouldn’t want to overplay it – these are modest increases in non-performing loans, apart from some sub-sectors in some countries.

You’ve been in your current role at the ECB for a year now, after 30 years at the Central Bank of Ireland. How does it compare? How does it feel now compared to then, also in view of the geopolitical tensions?

At the ECB, you’re in a slightly different position than when you're in a national central bank. At a national central bank, you’re contributing to the wider European effort, and you may be on many committees and task forces, and the governor is on the Governing Council.

But when you’re at the ECB, you’re more at the centre of all of that, with all of the national central banks. You’re not just one. And obviously the ECB, like Ireland, is very international, very global, and was involved in a lot of international discussions. The ECB is represented in many of the international institutions – it has roles in the Financial Stability Board and the Basel Committee and so on – which is not necessarily the case in Ireland. So there’s some difference in the focus of the work I am involved in.

In terms of the current situation, I think a big difference between the financial crisis and now is that the financial crisis was around the crystallisation of risk – things actually happened. And unfortunately, in the case of Ireland, the banking crisis was very severe.

At the moment, there’s a very high level of uncertainty, and there are many things that could happen. There are vulnerabilities in different economies and different ways in which that might play out. But so far, a severe shock has not actually manifested itself in the current phase.

One reflection I would have, going back over my broader career from the Central Bank of Ireland and even to now, is that after the financial crisis, we did a huge amount of work to rebuild the economy and the financial system, in the expectation that we had been through a big crisis and hopefully we wouldn’t see anything like that again. And then there was Brexit, which obviously affected the whole of Europe, but had particularly pronounced potential effects for Ireland. Then we had COVID. Then the horrendous situation with the war in Ukraine, which is very present in people’s minds in Ireland, but I must say that since I moved to Germany, it’s felt even more present. We had the inflation shock. We had the banking turmoil in Switzerland and the US in 2023.

So it tells me, looking at my career more broadly, that shocks do happen. They can manifest themselves in many different ways. From the point of view of resilience, the gaps between those shocks have been rather short. This goes back to economic resilience and, from a banking supervision point of view, to the resilience of the banking sector, both financial – its capital and its liquidity, which were a big focus after the financial crisis – and operational resilience such as digital and cyber resilience, which has become more prominent over the last 10 or 15 years. We’ve moved much more into operational resilience, so a focus on both financial and operational resilience, whereas after the financial crisis the focus was much more on financial resilience.

So my summary would be: resilience is important, as is the role central banks and supervisors play in the economy and the financial system. As an example, the former Governor of the Central Bank of Ireland, Patrick Honohan, spoke about the role of central banks as crisis managers: things really do happen and can manifest themselves. That has certainly been our experience in the last 15 years since the financial crisis, with these large shocks or potential shocks.

In your drive to simplify the rules for banks, you’ve said that any proposal to change the EU’s prudential framework should sustain the current levels of resilience. Financial resilience seems to be your red line. But in simplifying the capital buffers, the definition of them, merging different capital buffers into just two, could that lower capital requirements in any way? Or should it?

The main point I would make here is, first of all, the importance of capital and liquidity. And I think in Ireland we know this almost more than any other country, given what happened to the Irish banking sector.

If we simplify the framework or the buffers, or reduce the number of buffers, for example, it’s independent of the decision about the level of capital that’s required. The level of capital that’s required is really about our assessment of the risk environment, and that’s partly us at the ECB. We make the decisions for individual banks’ microprudential requirements, while for macro buffers, like the countercyclical capital buffer, national central banks like the Central Bank of Ireland make those decisions.

So the idea is that we could change the rules around the capital stacks, around what the buffers are for and how they’re calculated, but the risk assessment and the quantification of how much capital is required are independent of that. So the act of changing the framework or changing the buffers methodologically should not be what changes the level of capital requirements.

If there’s a different risk assessment, for example if a national central bank decides that a lower countercyclical capital buffer is warranted on the basis of risk, then fine. But it shouldn’t be the legislative change or the change in the framework that prompts the change in the level of capital requirements.

Our view is that in general the levels of capital are appropriate now, given the number of shocks we have had and the level of uncertainty. In fact, from our point of view at the ECB, if we saw that individual banks had a higher risk exposure, or a higher exposure to certain events or volatility, then there may even be an argument for individual banks to have higher capital requirements. So I’m not talking about an increase in capital levels across the system, but more on the basis of the risk assessment of individual banks.

There was certainly a lot of hope among the Irish banking sector that European simplification efforts would take the burden off banks with legacy issues. It’s been more than 15 years since the financial crisis; we’ve paid our dues, in effect. Could there be any changes for those types of banks, or, as you say, are the capital levels as they are appropriate? Is that a red line, effectively?

When we talk about capital as a red line, it is really about the banking system and the general level of capital in the system. If there are individual banks in Ireland or anywhere else that, for example, have seen lower levels of non-performing loans, if they’ve made amendments to their models which are used partly for the calculation of capital requirements, and they have addressed concerns that we had about the models, then of course these banks would see lower levels of capital requirements. And this has happened in recent years. But this is because there’s been a change in their risk profile or they’ve addressed gaps that we see in their framework. So this would be more about individual banks.

On the more general issue of the ‘so-called’ burden of supervision: we published a report about how day-to-day supervision works. European banking supervision has been here for over a decade now. At the beginning, there was a lot of focus on fixing the financial crisis. There was a lot of focus on getting the single European supervision set up, particularly creating a level playing field, with consistent treatment of all banks.

The “wise persons’ report” of 2023, as well as some feedback that we got, for example from the IMF when they do their assessments of supervisors, recommended that – now that we were more mature and evolved – we could look at some of the processes again.

So I think that banks, including those in Ireland, will see some tangible differences in our approach to supervision. That’s more about focusing on the main risks. We have what we call a multi-year approach now, where we don’t necessarily do everything every year. We focus on the main risks, on our inspections being more targeted on some of the key risks, and in terms of our follow-up being more focused on the key risks. So there will be changes that will be visible to the banks, including in Ireland, in terms of the approach.

You have also said – and it’s a common phrase I've heard throughout Brussels – that simplification doesn’t mean deregulation. But in the context of a clear deregulatory drive in both the United States and the United Kingdom, does that leave the EU at a disadvantage? Is the competitiveness of European banks at the forefront of your mind when you are doing simplification exercises like this?

We absolutely acknowledge that competitiveness is really important – for both economies and banks.

One of the concerns we'd have about getting caught up in the international issues is that, in the end, it’s a kind of race to the bottom. And coming back to your comment about how long I’ve been in the world of central banking, we know that crises manifest themselves in cycles. The economy has cycles, the financial system has cycles. And we’ve seen in the past that deregulation can lead to crisis in the future.

We absolutely accept that there can be simplifications, improvements, streamlining. But this should not be done in a way that’s really about deregulation.

On competitiveness, we know that the economy goes through ups and downs. We believe that strong banks that can be resilient through those ups and downs, banks that can continue to lend in good times and in bad, that have that kind of resilience, are actually more competitive in the long term. And that’s what the economic literature would say: you have to have more of a long-term view.

So we don’t want to see an approach where there’s a more short-term view taken. Ultimately it wouldn’t serve us well in the long term. And that’s really what we’re trying to protect against.

Last December the European Commission published a proposal to overhaul market supervision. Some Irish fund managers are a little bit nervous that this central supervisory authority might absorb some of the expertise that is now in the Central Bank of Ireland. What do you make of that? And especially because Ireland is assuming the EU Council Presidency, does it put Ireland in an awkward position?

In the Presidency role for any country, you have to try to be a neutral arbitrator, regardless of which country you are.

On the wider issue of non-banks and their supervision, the really important thing, also for us at the ECB – even though we don’t supervise the non-banks – is that since the financial crisis, the role of non-banks has increased very significantly in the financial sector.

If you look globally, they now account for around half of global financial assets. And in general, including in international organisations like the Financial Stability Board, the focus on the need to regulate and supervise non-banks has been very significant for a number of years now, and the Commission has already brought forward a number of related proposals. So it is an area that warrants scrutiny and attention.

At the ECB, we look very carefully at the connections between banks and non-banks and banks’ exposures to them, and we also look at this issue about financial markets. If something happens in the non-bank sector, this could precipitate a financial markets issue, like what happened in the “dash for cash” in March 2020, for example. So it’s an important issue for us, even though we don't supervise non-banks.

From our point of view in the ECB, because of the need for more integration and less fragmentation in the European system in general, we are in favour of the savings and investments package. And of course we are in favour of the banking union.

On central supervision, I think that at the ECB we have been very successful in addressing the risks that manifested themselves in the financial sector after the banking crisis. We have also been successful in setting up a harmonised approach to banking supervision that delivers a level playing field.

Maybe one area that even we would acknowledge has not gone as far as we would like is integration in the broader banking market, specifically in terms of helping citizens access banking services across borders.

So what does this mean for non-banks? Single supervision, through more supervisory convergence or a central supervisory authority, could bring more harmonisation, more consistency, a more level playing field across supervision. But in and of itself, a central supervisor might not be able to deliver an integrated market and financial system.

Also, one of the Commission’s key priorities is retail investment – the role that retail investors can play in financing the European economy. It could be a very important element, but on its own, I don’t think it will deliver a more integrated market. You need the other aspects of the overall savings and investments union package to be targeted as well.

Ireland and Luxembourg seem to be on the fringes on this one – small countries against bigger Member States and the European Commission itself who support more supervision, and more centralised supervision. How do you view that?

On all of these packages, on all of the files, different Member States have different views, and in the end, we have to try to reconcile those and find a way forward.

For me, the more important issue is: if you go back to Mario Draghi’s report from two years ago, and if you add some of your questions around geopolitical risk and the changing international order, you can say that Europe has some challenges at the moment. But you can also see this as an opportunity. The things that are happening at the moment are an opportunity to remove barriers in the Internal Market, to have a deeper banking union, to have a deeper savings and investments union.

While allowing for the fact that different Member States have different views, I would hope, and the ECB would also hope, that this is an opportunity to actually make real progress, not only on capital market integration, but on many different aspects. The Draghi report highlights the depth of the frictions and internal barriers that we continue to have in the Internal Market. If we could make progress on those, it would make the European economy and the European financial system stronger and more resilient. Of course, you still have to consider the international environment in which you operate, but it would make us stronger within that.

Turning to securitisation, the Commission made a proposal last year. It seems that the positions of the Parliament and the Council have now matured. Again, it's something that the Irish Presidency will likely take to conclusion. I understand there’s some concern, especially in the European Parliament, about securitisation because of role it played in the 2008 financial crash. Would you share those concerns? Or is securitisation in the form it has taken in the Commission proposal a benefit for banks, to be able to free up more space on their balance sheets to lend to the real economy?

The ECB has published an opinion on the Commission’s proposal on securitisation. We recognise that securitisation can play an important role because, if done in a certain way, it allows banks to transfer risk off their balance sheets. The issue is really about how it’s executed.

Going back to the 2008 financial crisis, what was concerning was the complexity and opaqueness of securitisations and the manner in which they were done. So we’re supportive of the idea of securitisation, provided it’s done in a way where there is actually a genuine risk transfer and it’s not about capital optimisation.

As part of work we are doing to streamline banking supervision, we’ve also made some changes to our processes. When banks do securitisations, they have to come to us so that we can examine and approve them. The idea is that if banks use a more simple, standardised, straightforward form of securitisation, they get a “fast-track”. They get a quicker, more straightforward process. Where securitisations are more complex and there’s no real risk transfer, then they will be under a lot more scrutiny. So our word of caution is about the manner in which securitisation is done and making sure that risks are properly recognised and managed.

Another issue is the body of legislation going through on the digital euro. Valdis Dombrovskis, the European Commissioner for Economy and Productivity, said it’s really important to get this through, that we need the digital euro now as a counterweight to the United States and to dependence on the dollar. German Chancellor Friedrich Merz has said something similar as well. Banks are a little bit sceptical about the need for it. How do you go about “selling” the digital euro given that context, and especially given the heightened geopolitical risk and this talk about selling off US bonds and the weak dollar?

One thing that’s changed a lot in the world of central banking and supervision in the last five or ten years has been the whole approach to payments and the nature of money itself, and how money operates in the system. The use of cash, which is public money issued by the central bank, is declining, and digital payments are becoming more and more dominant. I know that, at a customer level, many people think they have a digital euro already on their phones, but that’s not a digital equivalent to cash.

At the ECB, we’re very conscious that citizens’ connection with cash is very much through central banks, and through the idea that we should have control of our own monetary system. So the digital euro is very much conceived with that in mind.

There is, of course, the political process, and we have to go through all of that before it would actually be launched. But if and when the digital euro is launched, then the issue you raise – explaining to the public the benefits of the digital euro and how it will work – becomes central.

I know there’s been speculation about the digital euro being used to monitor transactions. This is obviously not going to happen, not only because we follow European privacy laws but because we simply won’t have the data – we won’t know who pays what to whom. But we need to make sure that we reassure citizens around that.

I think there’s now an opportunity for us to enhance the resilience and autonomy of our own payments infrastructure and our own approach to money within Europe. We can deliver something that would really benefit citizens in terms of their access to core payments through an infrastructure that is entirely European.

One of the major risks that’s been discussed recently is the potential for an AI bubble to burst. How big a factor is that in your traditional stress tests or what you might expect to show up in the reverse stress tests? Is that something that would be country-specific, or is it a generalised risk that you see there?

We haven’t seen the scenarios that have come back from banks yet as part of this year’s reverse stress test, so I don’t know if it’ll be something that they consider in terms of their own exposures, maybe to certain countries. But in general, AI is something that of course we look at.

First of all, we use it ourselves internally. We’re developing what we call “suptech” (supervisory technology) tools to help us with data and the thousands of documents we receive – with guardrails and constraints, of course.

When it comes to banks, we look in general at their digital strategy, including AI. Around 85-90% of the banks that we supervise have already told us they’re using AI in one form or another. What we want to see are strong systems and controls around that. For example, how do they make sure, if they’re using AI in credit decisions, that there’s no inherent bias in the model? We look very much at the governance.

Regarding stock markets and equity markets, we look at exposures and how they might manifest themselves in banks. So if there’s disruption in stock and equity markets, are the banks exposed to that, and if so, how?

I’m not saying it’s specific to AI; if there were any form of financial market disruption, we would look at that and European banks’ exposures to it. If you look at the ECB’s regular Financial Stability Review, equity markets in general appear overvalued and there is potential for a sharp correction in asset prices, and particularly in AI-related stocks.

Fiscal risk has died down a little bit now, but last year, and to an extent recently, there has been potential for political tensions in France. At ECB press conferences, Christine Lagarde has been asked about the use of the Transmission Protection Instrument. Where do you think that risk now stands? Do you foresee an imminent use of the Transmission Protection Instrument for the first time?

I sit on the Supervisory Board of the ECB, not on the Governing Council so I am not involved in decisions about the Transmission Protection Instrument.

More generally, this issue of geopolitical risk is partly about recognising that individual things can happen in different countries and jurisdictions. For us, from a banking supervision point of view, understanding sovereign exposures – regardless of which country they are in – continues to be an important part of what we do.

I also wanted to talk about your career. There is rampant speculation in Ireland about the term of the governor of the Central Bank of Ireland, which is up in August. You’ve been in this role at the ECB for a year now, and spent 30 years in the Central Bank of Ireland – you were the first female deputy governor. Do you think you’d like to be the first female governor?

I’m at the ECB now. I’m obviously very focused on my role here at the ECB.

I think it's good that people are interested in these roles and who serves in them because they are important. If you look at what's happening globally with central banks, if you look at the debate around central bank independence, I think if there is commentary anywhere – whether it’s the ECB or Ireland or anywhere else – about who is going to be in charge of a central bank, it highlights the importance of the role of central banks and their leadership.

In a world where central bank independence may be at risk or is under threat, or certainly up for debate, making sure our central banks have strong leadership and strong independence is really the part that’s important to me, especially when I think about my career, almost all of which has been spent in some shape or form in central banking.

Is it important for a euro area central bank governor to be a native of a euro area country?

Decisions about central bank governors are not matters for the ECB at all. The ECB isn’t involved in the process of appointing central bank governors, which, generally speaking, is a matter either for local finance ministries or local governments. That is also the case in Ireland, where it’s a matter ultimately for Minister Harris and the Government.

I’ve read that central banking is something you wanted to do from the beginning. Did you go into the Central Bank of Ireland with the aim of becoming governor?

I would say I never had, when I joined the central bank, career aspirations even to become deputy governor.

I went to the Central Bank of Ireland probably for two main reasons. First, I’d studied economics, and the Central Bank of Ireland was one of the few employers that had very large numbers of economists. That remains the case. At the moment, I think the bank may be one of the most significant employers of professional economists in the country. So I went there for that reason.

Second, something that throughout my career has remained a driving force and part of my own personal values is a dedication to public interest and public policy. I have a huge personal commitment to working in the public interest and shaping public policy. Here at the ECB, just like in the Central Bank of Ireland, we have this deep connection to citizens, to Europe and to doing what’s in the long term interest of Europeans. That public policy and public service commitment is a real personal motivator for me, both in my career at the Central Bank of Ireland and now here at the ECB.

Going back to central bank independence, it’s been a really dramatic time. In nearly 20 years of being in journalism, I’ve never seen central bankers write an open letter in support of another central bank governor. With all that’s going on with Jerome Powell, where do you think this is going to end up? What would be the effects if the Federal Reserve were seen to be at the mercy of politics?

I think independence is crucial, because the evidence and the literature show that independent central banks deliver better on the mandates they have been given – for example in terms of inflation targets.

The reason is related to what we touched on earlier about thinking more about the long term. Politicians are responsible for very important decisions in countries and governments, but those are within a political cycle. The actions of central banks, and that is true also for banking supervisors, take much longer to manifest themselves. Having a more medium to long-term view of how the economy and the financial system operate is really important.

This independence is very valued in the financial system and in financial markets, and is therefore a key driver of the credibility of policymakers and their policy instruments, not only in one particular country, but more generally.

Ireland will soon assume the Presidency of the Council of the EU. What do you think are the priorities that the Irish Government should be looking to, and the sensitivities it should have, with all these really important files on the table and with the world in a state of geopolitical flux?

The Presidency is a very important role, and it’s a huge opportunity for Ireland. I was involved in it the last time, when I was still at home. Ireland ran a very good Presidency and has a strong reputation in terms of its ability to do that. So it’s a big opportunity.

We are here in Brussels today; we can see the huge number of issues that are on the agenda. It’s absolutely clear to us at the ECB that simplification and competitiveness are key priorities. This is what drove the two major reports we published: one with our recommendations to simplify EU banking rules – which may be addressed during the Irish Presidency – and one with our agenda to streamline banking supervision and working on reforms that we can deliver. Competitiveness and simplification will be a big part of the discussion.

It will depend on the timing, of course, but the digital euro, which for us at the ECB goes almost to our core – the nature of money and the nature of central banking – will also be a huge priority. If it falls that way, I think Ireland will have a big opportunity.

The key thing for the Presidency is it acts as an honest broker. On an individual country basis, it can highlight the benefits of EU membership, the benefits of being a member of the euro area and how important all of that has been for Ireland, particularly as a small, open economy in a world where there’s so much geopolitical risk.

Are you enjoying living in Frankfurt?

Yes, I’m really enjoying it. The role is extremely interesting. The ECB is an inspiring place to work. This commitment to public service and to Europe; the calibre of the people that I get to work with. I did a lot of international work when I was at the Central Bank of Ireland, but the global, international work at the ECB has been extremely interesting, particularly in the environment in which we’re operating.

It’s also great to live in Frankfurt – I had been many times before, but of course it's different to actually be there rather than just visiting and staying in a hotel. You see things from a different perspective. When you’re closer to eastern Europe, for example, you feel the concerns that colleagues in eastern Europe would have around defence, around the situation in Ukraine, around cyber exposures and the like. So it is a different life experience as well, which I really enjoy.