Fireside chat

Conversation between Pedro Machado, Member of the Supervisory Board of the ECB, and Kian Abouhossein, Managing Director at JP Morgan, at the European Financials Conference hosted by JP Morgan on 21 November 2025

21 November 2025

We are seeing some deregulation, or at least simplification of banking regulation, in the United States. Do you see this affecting the competitiveness of universal banks in Europe? How closely are you monitoring the US developments? Can you highlight some of the simplification initiatives that are being implemented in Europe?

Our position has been consistent: ensuring that banks remain resilient is a prerequisite for competitiveness, and a global push towards deregulation does not challenge this view. Of course, an international level playing field is crucial, but a race to the bottom could be very damaging. We need global minimum standards to avoid another global financial crisis. In that sense, Basel III is essential for banks to continue funding the economy while remaining resilient to shocks, and it should be implemented consistently across countries.

When discussing supervisory burden, we need to look carefully at the nature and context of supervisory action. In the first ten years of European banking supervision, our supervisory action reflected the overall risk profile of the European banking sector. We were faced with a complicated environment of deterioration and a certain degree of fragility in many countries, so we needed to understand the causes to identify and address these vulnerabilities. Today, we have a much deeper knowledge of banks and have made significant progress in identifying vulnerabilities.

At the same time, we fully recognise the importance of ensuring that the supervisory framework remains efficient and proportionate, and we have an opportunity today to refine supervisory practices while maintaining the high standards that we have established.

However, it is important to note that much of the complexity in the European regulatory framework stems from national fragmentation. Aligning and harmonising rules across Europe will go a long way towards reducing complexity, and this is not solely the supervisors’ responsibility.

This is why we are supporting supervisory simplification in the EU wherever this is possible without reducing resilience. The Governing Council of the ECB has created the High-Level Task Force on Simplification to develop proposals to simplify the European prudential regulatory framework. The Task Force plans to deliver its proposals for simplification to the Governing Council by the end of the year, after which they will be presented to the European Commission.

Internally, our “next-level supervision” initiative is an example of the efforts we are making to simplify supervision. It focuses on six key areas to streamline processes and to make a tangible difference for supervised banks: decision-making, internal models, stress testing, capital-related decisions, reporting and on-site inspections.

And of course, the ongoing Supervisory Review and Evaluation Process (SREP) reform is also key in our simplification efforts to make supervision more targeted, efficient and risk-based.

We understand that the SREP is undergoing some modifications, SREP decisions were also communicated much earlier this year. What is the final objective of these reforms and what has been the feedback from banks so far?

Indeed, we launched a comprehensive reform of the SREP, which is our yearly health check of the banks. The reform comes as a follow-up to a report drafted by independent experts who assessed the SREP at the request of the former Chair of the Supervisory Board. We have been implementing the findings of the experts’ report which was published around two years ago.

As I mentioned, the objective of this reform is to make supervision more targeted, efficient and risk-based, as well as to ensure better integration with other supervisory activities.

In a nutshell, we continue to look at banks on the basis of their individual risk profile, but we now focus more on the material risks affecting each bank, while taking a multi-year perspective. This allows our Joint Supervisory Teams (JSTs) to focus on the most material risks affecting the banks, and enables a tiered approach depending on the findings. Findings are put into four categories according to their severity and urgency. We will prioritise the most severe ones and leave banks to address the other, less severe findings gradually, according to deadlines set and checked by the JSTs.

In terms of feedback, from what we have seen so far banks are pleased to see the reforms we are introducing. One major reason is that, as you mentioned, we are now communicating SREP decisions in October, which facilitates banks’ budget planning. Another important point is that SREP communications are now being made leaner and much more focused.

So we are moving forward with the SREP reform, leveraging on lessons learnt and feedback received to continue improving the efficiency and effectiveness of the SREP.

Geopolitical risks have risen significantly in the past few years. What specific steps are you taking as a supervisor to ensure banks are maintaining adequate operational resilience against such risks, including around cyber security?

Geopolitical risk is indeed very topical for us. While it is not new, it is a cross-cutting risk driver that can affect banks’ traditional risk categories. As such, it is already addressed in the standard supervisory framework, for example in the SREP, which considers its impact on the different risk areas. JSTs are already assessing how banks monitor geopolitical risk and respond proactively to changes.

One example of geopolitical risk affecting banks’ traditional risk categories is how it translates to cyber risk. We have seen an increase in cyberattacks on banks, especially since Russia’s invasion of Ukraine. This is why we conducted a cyber resilience stress test last year, the results of which show that banks have response and recovery frameworks in place, but areas for improvement remain. These results fed into the 2024 SREP and have helped increase banks’ awareness of the strengths and weaknesses of their cyber resilience frameworks.

Over the past year, global uncertainties have intensified, which has created an environment of heightened fragility, where risks once considered remote are becoming more likely. This is why the supervisory priorities for 2026-28 that were announced on Tuesday to coincide with our SREP conference reflect the need for banks to remain resilient in the current macro-financial and geopolitical environment.

The 2026 thematic stress test will be a reverse stress test assessing institution-specific geopolitical risk scenarios and their potential impact on banks’ solvency. In addition, we are performing regular market intelligence activities and deep dives to better understand, identify and assess risks stemming from emerging geopolitical shocks and raise supervisors’ awareness of the related challenges.

Overall, discussions with banks on the management of geopolitical risks are ongoing and include the full spectrum of identification, simulation and necessary action to mitigate or prevent impacts, but also operational resilience and robust governance. We continue to encourage banks to identify and manage their risks in the most appropriate way, while raising their awareness on the most critical sources of risks we have identified.

You have talked about digitalisation making the banking system more elastic. How is banking supervision adapting to this increased elasticity when it comes to deposit flows both in normal times and in times of stress?

Yes, I recently gave a speech reflecting on findings from an ECB working paper entitled ‘’Mind the App: do European deposits react to digitalisation?’’. Essentially, this study shows that digitalisation increases elasticity in the banking system, since depositors at digital banks are quicker to respond to rate differentials.

The study aligns with previous findings from the Financial Stability Board, which concluded that technological advances have made deposit transfers easier and faster in recent years, while finding some evidence that social media also has had an influence on some of the recent bank runs. This sensitivity, to both price incentives and confidence shocks, marks a structural shift in the banks’ deposit franchise.

However, the study is not alarmist, and it confirms that, in Europe, there has been no major structural break in depositors’ behaviour despite the surge in digital banking. Runs may be faster, but they are not necessarily more likely.

What is clear, though, is that digital transformation is gradually changing how banks operate and how financial services are delivered to customers.

As supervisors, we are keeping up with this fast-changing environment to help ensure the banking sector remains stable and resilient. Digitalisation has been a supervisory priority since 2022, reflecting its critical role in banks’ business model sustainability, governance and risk management, and emphasising the importance of these for financial and operational resilience. Over the past three years, we have gained valuable insights into banks’ digital strategies. This allowed us to integrate digitalisation into our supervisory practices by adapting our existing supervisory approach.

As technology, regulation and banks’ practices evolve, we will continue to scale up our capacity with a more targeted approach. Integrating depositors’ digital behaviour into supervisory assessments would be a welcome improvement. Supervisors should not only review banks’ liquidity buffers but also examine how banks segment and monitor their deposit base, whether they stress-test for ultra-rapid outflows, and how they communicate with customers through digital channels when under stress. Basel III’s liquidity coverage ratio assigns run-off rates to different categories of deposits, based on their presumed stability. However, these assumptions were calibrated in an era when withdrawals required a visit to the bank. If outflows can occur at extreme speed, those run-off rates may underestimate risks. Supervisors may need to revisit their assumptions for uninsured, digitally active deposits. Another point would be that, as the events of March 2023 showed, runs can materialise in a matter of hours, yet supervisors rely on monthly data. Policymakers should consider higher-frequency reporting of retail flows during stress periods, and perhaps even real-time monitoring of liquidity conditions for systemic institutions. Without such data, supervisors may always be one step behind digital runs. Finally, I am personally convinced that social media monitoring could soon become an integral part of banks’ risk management.

What are some of the key areas of focus for the ECB Supervisory Board in the near to medium term?

As I mentioned earlier, on Tuesday we announced our supervisory priorities for 2026-28. Supervisory priorities are set by the Supervisory Board of the ECB and reviewed annually. They are based on a comprehensive assessment of the main risks and vulnerabilities facing supervised entities, taking into account the progress made on previous years’ priorities and the outcome of other supervisory activities, including the SREP.

The priorities identified for 2026-28 focus on the need for banks to remain resilient in the face of geopolitical risks and macro-financial uncertainties – this is Priority 1 – while ensuring strong operational resilience and information and communication technology (ICT) capabilities, which is Priority 2.

As regards Priority 1, and in addition to what I mentioned earlier about geopolitical risks, the idea is to intensify supervisory attention in selected areas, to ensure banks continue strengthening their financial resilience in the current macro-financial and geopolitical environment. Supervisors will focus on credit underwriting standards and prioritise the assessment of how banks intend to mitigate potential future credit losses, as banks should ensure prudent risk-taking and sound credit standards to prevent the accumulation of non-performing loans. Also, as the CRR3/CRD6 package entered into force this year, supervisors now have a new priority – they will pay close attention to how banks implement the new, more risk-sensitive standardised approaches, which are designed to help with the calculation of capital requirements, especially for credit and operational risk. Strengthening banks’ management of climate and nature-related risks also remains a priority. Compared with our previous activities in these areas, the new work programme focuses on the transition from remediation and alignment with supervisory expectations towards issues related to transition planning.

For Priority 2, we consider that robust and resilient operational risk management frameworks and strong ICT capabilities are crucial in mitigating emerging risks and avoiding disruptions to banks’ critical operations and services. This is why our supervisory activities will continue to focus on strengthening banks’ ICT risk management practices. Given the slow progress banks are making in addressing deficiencies in risk data aggregation and risk reporting, supervisors will continue strengthening their remediation efforts to close gaps against the supervisory expectations following a system-wide, structured remediation strategy. Finally, we will gradually step up our efforts to engage with banks on how they use new technologies, in particular AI, to exploit the potential gains while also being aware of the associated risks. In this context, we will extend the scope of our focus from AI applications of prudential relevance to generative AI. More broadly, our activities in this regard will allow us to identify structural trends and risk drivers shaping the future of the banking sector in the medium to long term.

The pace of mergers and acquisitions has picked up in the United States under the Trump Administration. This topic is very important to investors, especially in some of the highly fragmented European markets. What are your views on bank mergers and acquisitions? We have seen some unsuccessful attempts, even for domestic consolidation, while cross-border consolidation remains even more difficult. As a single supervisor, what role can you play to remove some of the hurdles?

This is an important topic for us too. In an area with a single currency and a single monetary policy, which also has the Single Supervisory Mechanism and the Single Resolution Mechanism, cross-border consolidation makes sense, because certain risks are offset when operating in an integrated monetary area with free movement of capital.

One advantage of cross-border consolidation is that it creates banks which are more resilient to shocks, can take advantage of synergies and improve their profitability levels, or can benefit from liquidity being managed at group level. Such banks also find it much easier to access financing in certain markets as well as to diversify. Geographic diversification is also a good way of managing banking risk. These are all positive features for business, profitability and banking viability, so we see real benefits in bank mergers and acquisitions.

The ECB has taken steps to remove supervisory obstacles to cross-border integration, for one by developing a guide on the treatment of cross-border and domestic mergers across the Single Market, openness to cross-border expansion via branches and a possibility for cross-border groups to apply for liquidity waivers. However, it is important to note that the main barriers to financial integration are not prudential, but political. Completing the banking union and having a deposit insurance scheme in place, as well as reducing fragmentation within the Single Market would facilitate further consolidation. EU discussions should move from national perspectives to a Single Market logic that benefits all citizens.

On cross-border mergers and acquisitions specifically, to what extent do a lack of capital and liquidity fungibility across countries and the absence of a common deposit insurance scheme form an obstacle to such transactions? And from a regulatory standpoint, how significant is the development of a European deposit insurance scheme?

Studies show a strong correlation between cross-border mergers and acquisitions activity and the degree of regulatory harmonisation. It is one of the most significant structural barriers to cross-border banking consolidation, alongside regulatory uncertainty, political resistance and valuation gaps.

More specifically, the lack of harmonisation of certain rules, such as deposit insurance transfer rules, securities laws, reporting and audit standards, and tax rules continues to hinder cross-border consolidation.

We made it clear that banks operating across borders through subsidiaries can apply for a liquidity waiver to pool liquidity across legal entities. Nonetheless, there is a tendency sometimes to attribute the cause of lack of progress to waivers on different national insolvency laws, when in reality the common rules on resolution should be the driver for assessing the waivers Financial resources often become trapped within national boundaries, limiting banks’ ability to manage liquidity efficiently. This implies forgoing the diversification benefits that cross-border operations would otherwise provide and weakens the scope for private risk sharing in the European banking market.

However, the primary barrier to cross-border mergers is the fact that the banking union is not yet complete. The absence of its third pillar, a European deposit insurance scheme, means that deposits are not seen as being equally protected across the euro area. Without it, many banks remain reluctant to pursue cross-border mergers. This lack of uniform protection creates resistance to certain acquisitions and discourages market players from even considering potential transactions.

What is your view on the savings and investments union – do you feel sufficient urgency among the various stakeholders to deliver on the ambitions/recommendations laid out in the report by Mario Draghi on the future of European competitiveness?

We very much welcome the idea of a savings and investments union which is part of the European Commission’s recent proposals. The Commission’s strategy for the savings and investments union calls for progress on the European deposit insurance scheme, which is a step in the right direction for fine-tuning the banking union.

Having the third pillar of the banking union and a deposit insurance scheme are obviously important, but that is beyond the Commission’s control and depends on the will of the Member States to revive this project.

We hope these initiatives will generate some positive momentum to revive the discussion on a European deposit insurance scheme.

What is your view on the European Commission’s recent legislative proposals on the EU securitisation framework? Are these proposals not too complex in your view? As bank analysts, we find it not simple enough to provide a boost to the market.

The Commission’s recent proposals represent an important step in advancing the capital markets union. The ECB recently issued an Opinion on these legislative proposals. Overall, we welcome the proposal’s overarching objectives and the targeted improvements to the securitisation framework. The proposals are a step in the right direction to make further progress at Union level to achieve economies of scale in the development of securitisation products, facilitate the expansion of the market and support the integration of Union markets, all of which would broadly support the savings and investment union.

Regarding your point on complexity, I fully agree that we should avoid unnecessary complexity in the rules wherever possible. It is crucial that the framework fosters simpler and standardised securitisations, not only for prudential reasons, but also as a precondition for sustainable growth. Requirements should be streamlined and proportionate, without compromising financial stability. This is particularly relevant for the proposed changes to due diligence and disclosure requirements, which would simplify the Securitisation Regulation.

However, we see a risk that the proposals may go too far in lowering capital requirements, while at the same time making the framework more complicated, especially for complex structures. Our main concerns, as expressed in the ECB Legal Opinion, relate to the introduction of risk-sensitive risk weight floors. The risk weight floors are an essential component of the prudential treatment of securitisation positions which ensures a minimum capital charge on securitisation positions. In practice, the application of risk-sensitive risk weight floors could lead to very low risk weights for certain securitisation positions, well below the 7% floor that was applicable before the global financial crisis.

That being said, we welcome the intention to differentiate the intensity of preferential regulatory treatment according to the resilience of senior securitisation positions under stress, and to ensure that reduction of risk-weight floors and favourable treatment in the calculation of the liquidity coverage ratio apply only to positions that display sufficient safeguards. The ECB proposed some recalibration to the Commission’s proposal which is simpler and benefits originator positions in resilient senior positions in simple, transparent and standardised securitisations.

What is your view on the synthetic securitisation market, especially on significant risk transfers – do you see a risk of circular linkages between the originator banks and the investors in those transactions and what are you doing to mitigate or avoid such risks?

Synthetic securitisations are a very effective tool for banks to transfer credit risk to third parties. Where the supervisor is satisfied that the transfer is significant, the regulatory framework allows the bank to reduce its capital requirement accordingly and so match them more closely to the risks the bank retains.

In practice, this means that the ECB needs to assess whether individual securitisations achieve significant risk transfer or not. In addition to this transaction-level assessment, the ECB scrutinises banks’ risk management frameworks to ensure they are sufficiently well equipped to originate sound risk transfer securitisations. We are also mindful that banks should not rely excessively on securitisations for their capital planning.

If not properly managed by originator credit institutions and sufficiently transparent in terms of ultimate risk taker, large synthetic securitisations can create procyclicality due to flowback or rollover risk, which may have adverse effects on financial stability in times of crisis.

Currently banks seem to hold buffers on top of buffers on capital requirements and then have to undergo a separate process to get buyback approvals. Could this be made simpler, i.e. along the lines of the US system, which is not perfect but, following the stress test, gives clarity on the requirements for the year while banks have flexibility on capital returns?

We understand the concerns around the complexity of the current framework. While our system differs structurally from that in the United States, we have been taking concrete steps to improve efficiency, predictability and speed in Europe.

We have been working on fast-tracking the approval of share buybacks and other own funds transactions. European banking supervision adopts more than 250 decisions per year authorising transactions related to banks’ own funds, and more than half of the applications we receive annually are for business-as-usual capital management transactions, such as rollovers of subordinated or Additional Tier 1 instruments. The fast-track process will be used mainly for these types of transactions, as well as for non-complex share buybacks.

We are reviewing our internal processes, and we are leveraging technology to make sure that approvals can be faster if supervisors have no concerns about the impact of these own funds transactions on banks’ resilience. This will allow banks to enjoy better predictability and act faster in the markets.

While we want to enhance efficiency, our primary focus is of course still on keeping banks safe and sound, to make sure that speed does not come at the expense of bank’s resilience.

The ECB recently announced that the Eurosystem is moving to the next phase of the digital euro project. What role can a digital euro play in the potential ecosystem of stablecoins, fiat money?

As people increasingly prefer to pay digitally, it is our responsibility to ensure there is a reliable, public and free digital means of payment that works equally in all euro area countries.

Recent global developments, including the rapid growth of privately issued stablecoins, make it urgent to develop a digital euro that both preserves our monetary sovereignty and addresses the fragmentation in the European payments market.

Money is fundamentally a public good. The stability of Europe’s monetary and financial system has been built on central bank money acting as an anchor upon which commercial bank money prospers and develops. A digital euro would extend this anchor into the digital realm. Our job is to safeguard settlement functions so that neither citizens nor the broader economy are exposed to financial instability risks. In an environment where stablecoins operate alongside traditional forms of money, a digital euro would help ensure this stability.

What is your view on stablecoins, on both the opportunities and the risks they might pose to banking stability? Does the increased pace of stablecoins regulations in the United States bring a sense of urgency in other countries too?

Recent US developments may accelerate the adoption of US dollar-denominated stablecoins and we need to be vigilant with regard to risk spillovers to the European banking sector and financial stability.

The EU should continue to exploit the innovative potential of digitalisation. This could include the use of tokenised traditional assets, including tokenised deposits, and well-designed, regulated homegrown euro stablecoins. Tokenised deposits and well-designed and properly regulated euro-denominated stablecoins issued in Europe and supported by clear, enforceable rules and effective oversight can strengthen Europe’s strategic autonomy by reducing dependence on third-country stablecoins and mitigating associated risks. They could also drive innovation in cross-border payments, enabling programmable transactions and tokenised securities settlement.

However, we must consider risks and long-term implications for the monetary system. The regulatory divergences with the United States increase concerns about multi-issuer models, under which the same fully fungible stablecoin could be issued in different countries under varying regulatory regimes. In that context, we welcome the recent recommendation by the European Systemic Risk Board that the Commission should clarify that third-country multi-issuer stablecoin schemes are not permitted within the current framework under the Markets in Crypto-Assets Regulation. Without safeguards, we risk being exposed to crises from outside the EU.

Some recent credit incidents in the United States have prompted questions around underwriting standards. While they are currently seen as idiosyncratic, what is your view of the growth in private credit and the broader non-bank financial institutions market over the last few years and its interlinkage with the broader banking sector?

In recent years, non-banks financial institutions (NBFIs) have become more prominent in financial intermediation, and this has attracted greater attention from us and from authorities worldwide. In the euro area, NBFIs now account for more than half of financial sector assets, but their significance and market dynamics vary considerably across entity types and countries. A key area of concern is the private credit market. Banks’ exposures to private credit funds have significantly increased, while risk management practices do not appear to have kept pace with developments in this rapidly expanding segment.

More broadly, the growing size and complexity of NBFIs raises risk management challenges for banks. These need to be addressed to mitigate contagion. Banks interact with NBFIs through direct lending, derivatives, prime brokerage and co-investments. These intricate connections are critical contagion channels during times of stress. Mitigation of spillover risks for banks requires strengthening their own risk management of NBFI linkages. As supervisors, we are holding banks accountable for: (i) integrating risk frameworks that reflect the complexity of NBFI exposures, (ii) being able to aggregate exposures across business lines, (iii) identifying correlations and managing concentration risks, and (iv) enhancing stress testing and governance around NBFI-related risks.

As an outside investor it is very difficult to make a like-for-like comparison across banks on the size and type of their exposures to NBFIs in the absence of a standardised definition. Is there any discussion on making the disclosures more transparent and useful for bank investors?

Data gaps are indeed another source of concern for us. Because disclosure requirements outside the banking sector are lighter, we lack reliable and granular information on banks’ exposures to NBFIs. This limits the ability of both market participants and regulators to properly assess systemic risk. Closing these data gaps is therefore critical to effectively mitigate risk.

On our side, as mentioned before, ECB Banking Supervision continues to monitor and encourage banks to strengthen risk aggregation, stress testing and governance. However, more consistent and transparent reporting by NBFIs is also needed for sustainable progress.

We are therefore in favour of further harmonising and expanding reporting requirements in this area, for one in order to facilitate smoother information-sharing among authorities at the global level.