Interview with Perspektiven der Wirtschaftspolitik

Interview with Claudia Buch, Chair of the Supervisory Board of the ECB, conducted by Karen Horn

13 May 2026

Professor Buch, the current geopolitical situation seems uncomfortably fragile and Europe finds itself in a tough spot between aggressive superpowers. Do we need to be concerned about our banks on top of all that?

At the moment the indicators for the banking sector are looking good. Levels of capital have risen since the financial and sovereign debt crisis and are fairly stable. Liquidity conditions are also good. Banks’ profitability has improved, driven by the increase in interest rates compared with the low-interest rate era. The share of non-performing loans, which soared during the financial crisis and the European sovereign debt crisis, has fallen from an average of 7.5% in 2015 to around 2%. The change is particularly positive for those countries where the non-performing exposures were above average to begin with, such as Cyprus, Greece, or Spain. In all countries, the share of banks' non-performing exposures is now firmly in the single digits. There has been a very slight increase in recent years – would you like to guess where this has occurred?

Here?

Exactly – in those countries where the share of non-performing loans during the crisis was very low, including Germany or Austria. Overall, however, this does not change the fact that the resilience of the European banking sector has improved significantly. This is due to better regulation and supervision, as well as improved risk management on the part of banks. It was very important that the shocks of recent years – the COVID-19 pandemic and the energy crisis linked to Russia’s invasion of Ukraine – have been buffered by fiscal to a large extent. As a result, these major shocks didn’t affect banks’ balance sheets.

Will it stay that way?

There are indeed a number of risks, especially geopolitical ones. The effects of the US government's tariff hikes and higher energy costs are only gradually affecting companies and banks' balance sheets. Banks need to assess and manage the risks in a forward-looking manner, thus safeguarding their resilience.

Supervisors support this with clear priorities: first, we focus on improving banks’ resilience to macroeconomic and geopolitical risks, including climate and environmental risks; and second, banks need to be operationally resilient. They need to be able to deal with cyber risks for example, and have robust internal information systems to manage risks.

At the moment the ECB directly supervises around 112 major European banks. Do you think that these banks appreciate your supportive but very close supervision – or do they find it too intrusive?

That question is for the banks themselves. Of course, supervision and regulation are not always met with enthusiasm. That is why we maintain a close dialogue with the banks and make our processes as efficient and comprehensible as possible. Overall, I think that banks appreciate the benefits of European supervision. Today we can compare banks much better than at the beginning of the banking union, ensure uniform standards and show good practices in the sector.

In the case of less significant institutions, we have a coordinating role, as these banks continue to be supervised at the national level. In Germany in particular, this affects a relatively large part of the banking sector, accounting for about 40% of banks' assets, compared with 16% for the euro area as a whole. A large part of these less significant banks are classified as “small and non-complex institutions” (SNCIs), and the reporting requirements for those banks are already significantly lighter.

There is certainly a scientific and political debate as to whether banking regulation and supervision have gone too far and become too complex, hampering growth and weakening international competitiveness.

I don't think that's true, but we still take this discussion very seriously. We have a comprehensive reform agenda to simplify our processes, and to become more efficient, effective and risk-based. We are not lowering our supervisory standards – on the contrary, protecting banks’ resilience is central for us. As for the discussion on international competitiveness, the Basel Committee provides international minimum standards which does not mean that all regulations have to be exactly the same; there is scope for national implementation. Overall, the capital requirements for European banks are comparable to those in other major jurisdictions. Empirically, well-capitalised banks tend to be more efficient, more profitable and therefore more competitive.

Then why the constant complaints about increased capital requirements?

Equity capital is a form of financing like any other, but banks see it as expensive compared with debt. One reason for this can be implicit fiscal guarantees: if depositors or other lenders expect the government to step in and absorb losses in a crisis, then the cost of debt does not reflect the actual risks. The different tax treatment of debt and equity also plays a role: interest payments are often tax-deductible. From the point of view of society, however, the advantages of banks having adequate levels of capitalisation clearly dominate: well-capitalised banks can absorb potential losses on their own, and the government does not have to use taxpayers’ money to intervene. Well-capitalised banks can lend more and better take the associated risks. This is especially important in times of crisis.

Does the time horizon of banks’ management play a role here?

Certainly. If banks look at the next few quarters only, they may choose riskier strategies to boost profitability in the short term. Lower capital automatically increases the return on equity. At the same time, though, the bank becomes more risky; if it gets into trouble, there is less loss-absorbing capital available. Therefore, from a supervisory point of view, we consider the long-term viability of banks' business models. For example, if banks want to conduct share buybacks that we need to approve, they have to provide us with a solid medium-term capital plan over a three-year period.

What about the too-big-to-fail risk – do we now have this under control?

There has been a whole package of reforms to address the negative externalities of large banks for financial stability. First, we now have the Single Resolution Mechanism, a new European institution with the regulatory framework necessary for the resolution of banks. There is an industry-funded fund to cover the costs of financial distress. Second, large banks now have to meet higher capital requirements; the surcharge is intended to capture their systemic risk externality. In addition, there are additional requirements for bail-inable debt capital, which can be converted into loss-absorbing capital in a crisis. Third, supervision has become more intensive.

Several years ago, the Financial Stability Board (FSB) published a comprehensive evaluation report on these reforms.^[1] It shows progress. For example, the pricing of bonds issued by banks now better reflects the underlying risks. Banks have thus better incentives to avoid excessive risk-taking. But the report also shows that there is work to be done. For example, Europe still has no common deposit insurance. There are unresolved issues around how liquidity would be provided in the event of resolution. Closing these gaps is crucial for the system to remain resilient against crises.

Supervision can only be as good as its institutional set-up. What is your experience – does European banking supervision have sufficient resources in terms of staff, tools and sanctioning options?

At the ECB, around 1,500 people work in supervision and we cooperate very closely with colleagues in national authorities. This means that we are well-staffed, but of course we also have to set priorities. In terms of supervisory instruments, our toolkit is quite complete, including the imposition of sanctions, for example if banks violate directly applicable EU legislation. We may impose periodic penalty payments if we conclude that a bank does not comply with legally binding obligations and has not remedied the identified deficiencies within a given deadline. We apply these instruments very proportionally: where necessary, we use the tools given to us by the legislators, but gradually and in a structured process so that banks can prepare.

How does this work in practice?

One example is the risk management of banks to identify, assess and manage climate and environmental risks. Let me give you an example of why this matters for supervisors. If banks grant loans in regions threatened by physical risk such as floods, they need to take this into account in collateral valuation. Since 2019, we have been particularly focusing on climate- and nature-related risk management. At that time many banks paid little attention to climate risks. The situation has improved significantly in the meantime, because we have taken a step-by-step approach and formulated clear expectations. In 2020, we published a guide on climate-related and environmental risks to provide transparency on how banks should manage and disclose climate risks. In 2022, we conducted a stress test on climate risks and informed the banks where their risk management could be improved. For any deficiencies we found relevant, we issued binding decisions that included potential penalty payments if the banks failed to meet the requirements. However, we had to use this option only in very few cases. For all these measures, it is key for us to remain proportionate: we start with moral suasion and adjust our instruments if a bank’s actions are insufficient or too slow.

Earlier, you mentioned the lack of deposit insurance. Why are we not there yet?

This is, to a large extent, a political issue. The European banking union is designed with three pillars: supervision, resolution and deposit insurance. The first two pillars have been in place for a decade. In the case of deposit insurance, the issue was how to deal with the high level of non-performing exposures at the beginning of the banking union. In the meantime, legacy assets have been significantly reduced and the level of non-performing exposures on banks’ balance sheets is currently low; nevertheless, there are risks on the horizon. This is why now is the right time to think about concrete steps towards a European deposit insurance scheme.

Is anything happening in that regard?

A certain dynamic is indeed gaining momentum in the political process. After all, one of the goals of the banking union is to break the sovereign-bank nexus, that is the interdependence of risks between banks and states. In the meantime, through the Single Resolution Fund, there are more resources from the industry to deal with financial distress. But a European deposit guarantee scheme would be key to further decoupling risks and ensuring that all depositors are equally protected. It would also promote market integration: currently, just under 2% of deposits are invested cross-border, meaning that the European banking market remains highly fragmented along national borders. Incomplete market integration is the real structural issue for banks’ competitiveness – far more so than how regulation or supervision compare internationally. And I am convinced that bank customers would also benefit from a more integrated market.

Are the newly emerging risks distributed unevenly across regions and could this complicate the political process of reaching agreement on deposit insurance? Comparable, for instance, to the way that the geopolitical risk of the threat posed by Russia is perceived less acutely in southern Europe than in eastern European countries, which creates challenges for Europe's collective defence capacity? Do views on the need for deposit insurance also differ from region to region?

I don’t think so. Geopolitical risks can affect small, regionally active banks just as much as large ones with an international presence. Cyber risk is a case in point. It can affect any bank and is often largely driven by geopolitical motives. In recent years, we have seen not only a much larger number of cyberattacks on banks but also more severe attacks. And these attacks are not always related to banks’ geographical proximity to conflict zones. Because all banks can be affected by geopolitical risks, we developed a framework for dealing with those risks two years ago. This framework describes the channels through which geopolitical risks can be transmitted to banks.

What channels are these?

One important channel is, of course, the financial market channel – such as sudden increases in risk premia and market revaluations triggered by geopolitical events, as we saw, for example, after the announcement of new tariffs in April 2025. And the real economy obviously plays an important role too. If firms are severely affected by tariffs, supply chain disruptions or higher energy prices, the quality of credit portfolios may deteriorate. And it goes without saying that there are concrete operational risks related to cyberattacks and outsourcing. The spectrum is very broad. We are currently working with banks to better understand how they would be affected by geopolitical stress scenarios and how they would respond to them. Last year, we conducted a European stress test with a common scenario for all banks with regard to tariffs and financial market turmoil. Overall, banks have sufficient capital buffers to absorb losses in an adverse scenario. We are now carrying out a reverse stress test. We set the capital loss for banks at 300 basis points and ask which adverse scenario would lead to a loss of that magnitude. This stress test is based on banks’ internal risk management tools, thereby reducing the costs that stress tests place on banks.

What were the results?

The aggregated results will be available in the summer, but we are already working with the banks to understand their scenarios.

You mentioned national fragmentation of Europe’s banking market. What would be the benefit of deeper integration?

Banks operate under very different legal, tax and institutional frameworks across national markets. This makes cross-border activities costly. A genuine single market for banking services would simplify the system, allow for more effective risk sharing and make it easier for banks to reap economies of scale and efficiency benefits. Of course, stronger competition can also lead banks to pursue riskier strategies or mean that some individual banks have to leave the market. But that is precisely why we have a European supervisory and resolution framework.

Back to the risks to the banking sector. Usually the risks include shadow banks, also referred to as the non-bank financial sector.

Yes, indeed. Since the financial crisis, banks have become more tightly regulated and more resilient. But this has not impaired their ability to provide services to the economy or to extend credit. On the contrary, they are better prepared for more challenging times. At the same time, however, the non-bank financial sector has expanded globally. On the one hand, this sector consists of pension funds and insurance companies which perform different functions than banks and are regulated accordingly. On the other, there is a growing segment of non-listed securities and debt financing – often referred to as “private credit” or “private markets”. We are closely assessing whether this creates risks for banks. Parts of these markets have relatively high levels of indebtedness and there is comparatively limited transparency about who is interlinked with whom and who lends to whom. Banks are often closely linked to private markets. They need to reflect this in their risk management and, more broadly, we need more information to be able to assess risks more accurately.

How is this progressing?

The Financial Stability Board is working to increase transparency at the global level, but the implementation of its proposals is still too slow. In the interest of global financial stability, it is important that we have a better understanding of the non-bank financial sector and address systemic risks.

Within the ECB itself, you have launched a number of reforms to streamline banking supervision processes. What are you doing in this area and why is it necessary?

We have achieved a great deal in establishing common standards and methodologies, but our processes have become quite complex over time. At the same time, we have to operate in a fundamentally changed environment – marked by geopolitical risks, but also by the digitalisation of the financial sector. This is why we are now streamlining all of our core supervisory processes. Our colleagues need sufficient time to focus on what really matters. Our reforms started back in 2022. At the time, my predecessor Andrea Enria set up an advisory group of independent experts to make recommendations on how to improve our annual health check, the Supervisory Review and Evaluation Process (SREP), for banks. When I arrived, the report of this expert group was already on my desk. In May 2024 we decided on a comprehensive reform of the SREP to make our processes more efficient, more effective and more risk-based. This also means clearer and more structured communication with banks about our supervisory expectations. Moreover, we are now taking a multi-year approach – not every risk needs to be assessed for every bank with the same intensity every year. We will complete this SREP reform this year.

What else do you plan to do besides the SREP reform?

We are applying the objectives of the reform to all key supervisory processes – within the existing regulations and without weakening resilience.^[2] For example, every new banking licence in Europe requires our approval, as does the withdrawal of a banking licence. Such authorisation procedures can be very demanding and complex administrative processes. We have introduced a more risk-based approach, with standardised formats for submitting information. That alone already streamlines the procedures.

Could you give an example?

One example is our fit and proper assessment of new members of banks’ management bodies. From the submission of documentation to conducting interviews with the candidates, there is a considerable amount of work involved. Until now, this has taken around 100 days, but we were able to significantly shorten the time this process takes. Or take the approval process for the use of securitisations. We need to assess whether a significant risk transfer has taken place, which leads to lower capital requirements. In less complex cases that do not entail major risks, this now takes around ten days instead of three months.

How is that possible?

Rest assured, this does not mean we're waving through in ten days what we previously scrutinised intensively over three months. We remain risk-based. Standardisation is very helpful as it gives banks a clearer understanding of what we focus on. Cases that meet the standard and do not involve major risks can be handled more quickly. We then devote the resources that are freed up in this way to reviewing more complex requests and analysing systemic effects. We are now extending this approach to all our procedures, and we are of course also taking feedback on our supervision into account. With regard to on-site inspections, for example, we have heard that inspectors sometimes request information that other ECB teams already have. That is why our teams work closely together to avoid duplication. This is backed up by a whole range of IT projects designed to streamline and digitalise our internal processes.

How does artificial intelligence (AI) help you with all this?

We receive a lot of information from the banks. AI helps us process this information faster. AI also helps with the fit-and-proper decisions on banks’ board members I mentioned before, by sifting through the CVs and making an initial assessment. Of course, this does not replace the work of those responsible for the decisions. Supervision requires a significant level of judgement and experience that AI cannot replace. But AI does reduce manual processes.

Banks also use AI to make their internal processes more efficient. We therefore examine the impact of digitalisation on banks’ operations – both its opportunities and risks. The key question is whether AI can improve the processing of information. Banks need to constantly assess credit risks, because of course that is their core business – and whether or not AI can actually improve such analysis will be decisive.

In addition, AI is also amplifying all digital risks.

Certainly. Most banks outsource certain services and thus become dependent on service providers in some way – and these can be AI firms. This is why there is now a new initiative – the EU regulation strengthening digital security in the financial sector, the Digital Operational Resilience Act (DORA) – to better capture outsourcing and the associated risks across different financial institutions. If many banks use the same provider for their outsourcing and that provider falls victim to a cyberattack, this may give rise to systemic risk. For the individual bank, these systemic risks are difficult to assess, so good supervision plays a central role here.

Where do you see unresolved issues internally?

Right now, we are focusing on implementing the agreed reforms. Our internal supervisory culture is very important here – we want all colleagues to feel involved and use the momentum to improve their daily work processes. This applies not only to the people who work here in Frankfurt, but of course also to colleagues in the national authorities we work closely with. We have two more key projects this year. First, we are revising our guides for banks with a view to better explaining our supervisory interpretations and good practices, better communicating our expectations to banks and clearly stating that these guides are not legally binding. And second, we are exploring ways to make our supervision and reporting obligations even more proportionate – while of course keeping them commensurate with the underlying risks.

And overall, with regard to the entire financial system?

At the moment, we are facing tensions that pose risks to strong regulation and supervision. On the one hand, risks have clearly increased, and there is less fiscal space than in the past to cushion shocks. On the other hand, the memory of the financial crisis almost 20 years ago is fading; the high costs of financial crises are not present in people’s minds anymore. Therefore, the temptation may be great for politicians to loosen regulation in the hope of boosting growth. However, resilience and growth are not in conflict – there is extensive empirical evidence to this effect. We need to have this discussion, but on the basis of good evidence, which we have both here at the ECB and thanks to many other, external studies. This is why we aim to further expand the infrastructure for evidence-based decision-making.^[3]