Interview with banko.ro

Interview with Sharon Donnery, member of the Supervisory Board of the ECB, conducted by Liviu Pop (banko.ro)

30 September 2026

You recently argued that the "less regulation equals more economic growth" equation is a risky oversimplification and that banking resilience is the very foundation of competitiveness. At the same time, the ECB is rolling out the next-level supervision initiative to streamline prudential processes. How do you plan to map the line between eliminating unnecessary administrative burdens for banks and maintaining the quality and level of Common Equity Tier 1 (CET1) capital requirements uncompromised?

Banking competitiveness and resilience are not competing objectives. European banks can only support growth sustainably if customers and markets have confidence in their resilience. A strong capital position is therefore not a limiting factor on competitiveness but a precondition for it.

The ECB’s next-level supervision initiative is about becoming more effective, efficient and risk-based. We have reviewed, and continue to review, supervisory processes to eliminate duplication, make better use of technology and data, and focus supervisory attention on the most material risks, both financial and non-financial. For instance, we have reviewed more than 100 supervisory publications, discontinued outdated documents and simplified key guidance to make supervisory expectations clearer and easier to navigate for banks.

At the same time, we have no intention of diluting prudential standards. Capital and other requirements remain firmly anchored in banks' underlying risk profiles. Where risks are elevated, capital expectations must continue to reflect that reality.

Your advocacy for "One market, one rulebook" often runs into national supervisory practices that enforce capital and liquidity ring-fencing. How can the interests of home supervisors in major western European banking groups be reconciled with those of host authorities in central and eastern Europe to achieve a truly integrated Single Market?

First, let me take a step back and recall why this is critical. Recent analyses by the International Monetary Fund found that the fragmentation in the EU Single Market is equivalent, on average, to a tariff of 110% on services, which is consistent with our own estimates. The banking union was established precisely to reduce fragmentation and support the free movement of capital and liquidity across the European banking system. The first step to achieving that is to have harmonised rules, what we call “one market, one rulebook”.

The question is how to achieve that while safeguarding financial stability in all Member States. The answer is that we must finally make progress in completing the banking union. Creating harmonised rules and robust safeguards, including a common deposit insurance scheme and a strong crisis management framework, will make it possible to reduce the need for national barriers and allow capital and liquidity to be allocated more efficiently across the banking system. As the ECB has argued, this also means increasingly treating the banking union as a single jurisdiction where appropriate safeguards are in place.

For central and eastern European countries, integrated banking groups can bring diversification, investment capacity and financing opportunities. At the same time, greater integration should preserve the diversity of Europe’s banking sector, where the different sizes of banks and business models serve different financing needs and strengthen overall resilience.

The Supervisory Review and Evaluation Process (SREP) is undergoing structural reform to make it more agile and focused on each institution's material risks. From the perspective of your new mandate on the Supervisory Board, what concrete changes will commercial banks experience in how their Pillar 2 guidance and requirements are set?

The SREP reform is intended to make supervision more focused, risk-based and effective. Supervisory attention will increasingly focus on the risks that matter most for each bank, rather than applying the same level of scrutiny across all risk categories every year. This makes supervisory engagement more effective, efficient and proportionate, and also allows for a more targeted dialogue between banks and supervisors.

For Pillar 2 requirements, the fundamental principle remains unchanged: requirements should reflect bank-specific risks that are not sufficiently covered by Pillar 1. Banks should not expect a general loosening or tightening because of the reform. Setting Pillar 2 requirements is simpler, more risk-based and avoids overlaps with Pillar 1.

Regarding Pillar 2 guidance, stress-test results will continue to play an important role. The goal is to ensure that the framework remains closely linked to banks' resilience under severe but plausible stress scenarios, while becoming easier for banks to understand and more predictable over time.

The ECB has formally included geopolitical risk management among its supervisory priorities for 2025-27, and recent stress test exercises assess banks' capacity to model counterparty credit risk under severe geopolitical shocks. What major methodological shortcomings have you identified in how banks currently evaluate geopolitical exposures, and how should their risk appetite frameworks be reconfigured?

Geopolitical risk is not new but has become more prevalent in recent years. It is now a structural feature of banks’ operating environment. One weakness we often see is an excessive focus on direct exposures, while indirect effects through customers, supply chains and financial markets can be equally significant.

Because geopolitical shocks are often unprecedented, historical data alone is not enough. Banks should therefore complement traditional models with forward-looking scenario analyses and incorporate geopolitical risks into their risk appetite frameworks. Our expectation is not that banks predict geopolitical events, but that they understand their vulnerabilities and can remain resilient under a range of adverse scenarios.

The results of the ECB 2026 geopolitical risk reverse stress test published in July show that banks were generally able to produce economically meaningful stress scenarios reflecting their individual vulnerabilities. The exercise, however, also highlighted some deficiencies. For instance, banks need to improve the granularity and risk sensitivity of their assessments, better align scenario narratives with solvency and liquidity impacts, use more realistic mitigating actions, and more clearly capture solvency and liquidity interactions in their stress-testing frameworks.

Given your successful experience leading the ECB's High-Level Task Force on Non-performing Loans in the post-crisis era, how do you assess banking asset quality in today's environment of structurally higher interest rates and pressures on sectors such as commercial real estate and small and medium-sized enterprises? Is there a risk of a new wave of non-performing loans (NPL) disguised behind temporary refinancing measures?

The European banking sector entered the current period of higher interest rates from a position of considerable strength. Asset quality metrics remain broadly resilient, and NPL ratios are significantly lower than in the aftermath of the great financial crisis.

That said, there are pockets of vulnerability. Commercial real estate continues to warrant close attention, particularly where valuation adjustments, refinancing pressures and weaker rental dynamics are affecting borrower repayment capacity. Certain small and medium-sized enterprise segments are also experiencing increased pressure from higher financing costs and slower economic growth.

One lesson from the post-crisis period is the importance of the early recognition and proactive management of deteriorating exposures. This is precisely why we have recently focused supervisory attention on credit underwriting and monitoring practices. Sound underwriting standards and the timely recognition of a borrower's deteriorating creditworthiness are essential to prevent future asset-quality problems from building up unnoticed. This is the best safeguard against the accumulation of future NPLs.

You co-chaired a Financial Stability Board (FSB) working group focused on risks stemming from open-ended investment funds. As shadow banking expands its market share in Europe, what interconnectedness and contagion risks do you foresee between the non-bank sector and the traditional banking system supervised within the Single Supervisory Mechanism (SSM)?

According to the FSB, the non-bank financial sector accounts for roughly half of global financial assets. Growth of this sector has allowed greater market-based financing and diversification of funding sources. But it has also increased interconnectedness between banks and non-bank financial institutions. This means that vulnerabilities outside the banking sector can quickly be transmitted to the banking system during periods of stress, for instance through credit exposures, liquidity facilities, securities financing transactions, derivatives, margin calls and shared asset holdings.

And banks may be affected not only through direct counterparty exposures but also through abrupt market movements and declines in asset valuations. Furthermore, risks can be difficult to assess because data on some parts of the non-bank financial sector remain incomplete. This can make it harder to identify concentrations, leverage and contagion channels in a timely manner. Improving transparency and closing data gaps is therefore important to better understand interconnectedness and emerging vulnerabilities.

From a supervisory perspective, banks need a comprehensive understanding of their links to non-bank institutions. This includes monitoring concentration risks, collateral quality, liquidity demands and potential contagion channels. Banks should also ensure that stress-testing frameworks include scenarios involving disruptions originating in the non-bank sector.

The objective is not to restrict market-based finance but to ensure that the financial system remains resilient as its structure evolves. A comprehensive system-wide perspective is increasingly necessary because financial stability risks do not respect institutional boundaries. This should be underpinned by the principle that the same risks should be subject to the same regulatory treatment, irrespective of where they arise in the financial system.

With the implementation of the Digital Operational Resilience Act, banking supervision is extending its focus beyond traditional financial metrics to cyber architecture and third-party IT and cloud dependencies. How will the Supervisory Board address banks that exhibit severe concentration risk on a small number of major third-party cloud providers based outside the European Union?

While cloud services can enhance efficiency, vendor lock-in and concentration on a small number of providers can create vulnerabilities that affect multiple financial institutions at the same time, making this a system-wide resilience issue rather than a bank-specific risk.

Where significant concentration risks exist, we expect banks to understand them thoroughly and to incorporate them into their risk-management frameworks. This includes a mapping of critical functions and cloud services, effective oversight by senior management, contingency planning, exit strategies, and business continuity arrangements including regular business continuity tests. Particular attention should be given to operational resilience under severe but plausible disruption scenarios. Banks should be able to demonstrate how critical services can continue during outages or cyber incidents affecting third-party providers. This has become particularly relevant with the arrival of frontier AI models that augment both attack and, hopefully, defence capabilities.

Supervisory engagement will be increasingly risk-based. Banks that demonstrate effective governance, transparency and robust operational resilience will be better positioned than those that don’t. Those with significant weaknesses should expect supervisory follow-up and, where necessary, remedial measures.

Risk data aggregation and risk reporting remain persistent vulnerabilities for many European banks despite repeated supervisory warnings. The ECB has indicated its readiness to deploy stronger enforcement mechanisms, such as periodic penalty payments. How close are we to seeing those daily financial penalties actively applied for IT data governance deficiencies?

Risk data aggregation and risk reporting remains among the most persistent weaknesses identified across the banking sector. This needs to change. Reliable and timely risk data are essential for sound decision-making, particularly during periods of stress. The challenge is not purely technical. Often it reflects broader issues involving governance, accountability and strategic prioritisation. Management boards must treat data quality as a core risk-management issue rather than as an IT project.

The ECB has communicated clearly that longstanding deficiencies cannot continue indefinitely. While decisions are always bank-specific and subject to legal processes, the direction of travel is clear: supervisors increasingly expect tangible progress rather than multi-year remediation plans with limited results. Banks should therefore assume that we will continue to focus our attention on compliance with the Basel committee on Banking Supervision’s “Principles for effective risk data aggregation and risk reporting”.

The ECB is advancing in the technical preparation of the digital euro, designed to complement cash. From a prudential supervision perspective, the primary concern remains the potential disintermediation of commercial banks through deposit flight. Do you consider the proposed safeguards – such as individual holding limits and the reverse waterfall mechanism – sufficient to prevent major liquidity outflows during market stress?

The ECB has repeatedly stressed that the digital euro should be a means of payment rather than a store of value and that its design should avoid adverse effects on financial stability and bank intermediation. That’s why there are safeguards designed to ensure it complements, rather than substitutes, bank deposits. For instance, the digital euro will not be remunerated, and there’ll be individual holding limits capping the amount of digital euro a person can keep in their wallet. This will also feature a reverse waterfall functionality, which means that the wallet automatically draws any additional amount needed for a payment from the linked bank account, ensuring convenience without encouraging large shifts of deposits out of the banking system.

Besides, supervisors will continue assessing liquidity implications. Our current analysis shows that, across different holding limits, the impact on deposits, liquidity and profitability is limited during normal times. And even in a severe stress scenario, the impact is manageable. So the digital euro clearly does not put bank liquidity positions and financial stability at risk.

Recent ECB estimates suggest that total infrastructure implementation costs for the digital euro across the euro area banking sector could range from between €4 billion and €5.8 billion. In an environment where banks must already invest heavily in upgrading legacy IT systems, how can financial institutions be convinced that the digital euro represents a long-term business opportunity rather than just a prudential compliance cost?

The investment required for banks to modernise legacy systems and strengthen digital resilience is generally significant. The digital euro could actually create opportunities for banks to develop innovative payment services, strengthen customer relationships and participate in a European payments ecosystem that is less dependent on non-European providers.

Banks would play a central role in distributing the digital euro and providing front-end services to customers. This creates scope for value-added services and innovation beyond the core payment function. Moreover, many of the technological investments needed for the digital euro overlap with broader digital transformation agendas that banks are already pursuing.

In that sense, the long-term business case lies not only in the digital euro itself but also in the modernisation of the payment infrastructure and the strengthening of Europe’s strategic autonomy in payments.

Bulgaria and Croatia engaged in the “close cooperation” framework as a stepping stone toward joining the euro area and the SSM. For central and eastern European countries like Romania that are part of the Single Market but have not yet adopted the single currency, what are the main prudential benefits and challenges of entering into close cooperation with the SSM?

The close cooperation framework offers non-euro area EU Member States the opportunity to participate in the SSM before adopting the euro. As seen in the case of Bulgaria and Croatia, participating in the SSM under the close cooperation framework, and simultaneously in ERM II, is part of the roadmap towards the euro, but non-euro area EU Member States can also enter into close cooperation independently of the route required to adopt the euro.

Adopting the supervisory framework of the SSM promotes consistency, transparency and credibility and can strengthen confidence among investors and market participants. It also gives participating authorities access to the SSM's supervisory expertise, common methodologies and cross-border risk assessments. This is particularly relevant in countries where subsidiaries of euro area banking groups play an important role in financial intermediation.

At the same time, joining the framework involves significant preparation. National supervisory authorities must align with common supervisory methodologies, reporting standards and expectations, and adjust their legal, HR and IT frameworks to allow their staff to participate in Joint Supervisory Teams and other SSM activities. This may also require banks to invest in governance, risk management and data capabilities. In addition, the ECB would conduct an asset quality review of the biggest banks in the country before close cooperation began.

Ultimately, the decision to enter into close cooperation is a decision to be taken by the Member State concerned. From a prudential perspective, the framework provides an opportunity to strengthen supervisory convergence and benefits in terms of financial stability and sustainable market integration while preparing for potential future euro area membership.

European banking sector profitability has hit historical highs in recent years, driven by favourable net interest margins. However, the ECB warns that these earnings are cyclical. How should banks deploy this accumulated capital to sustainably transform their business models – supporting the green transition and AI adoption – without taking on excessive governance risks?

Recent profitability levels have strengthened banks and created an opportunity to invest in their future resilience. However, current earnings may not be permanent and should not be viewed as a guaranteed long-term trend. This creates an important strategic choice for them. Rather than relying on cyclical net interest income, banks should use today's profitability to strengthen business models and invest in areas that support long-term competitiveness.

This may include financing the green transition, improving data infrastructure, modernising technology platforms and developing responsible uses of AI. These investments can enhance efficiency while better serving customers and the broader economy. At the same time, innovation must be accompanied by strong governance and risk management. AI adoption, for example, raises questions relating to model risk, transparency, accountability and operational resilience. Similar governance considerations apply to climate-related and environmental risk management.

Boards remain responsible for ensuring that strategic transformation is supported by effective controls, appropriate expertise and clear lines of accountability. The most resilient banks will be those that use current profitability not simply to maximise short-term returns but to build sustainable, technology-enabled business models capable of supporting Europe's economy throughout future cycles.