New challenges, enduring principles: navigating a complex credit risk landscape

Keynote speech by Pedro Machado, at the PWC European Conference “Inspiring Credit Risk: New Season, New Spirit – Shaping the future of Credit Risk Management”

Frankfurt am Main, 25 February 2026

Thank you for inviting me to join this event.^[1] It is a pleasure to be here to discuss the future of credit risk management, a hugely relevant topic given the complexities and challenges facing the European banking sector today.

The European banking sector faces an increasingly multifaceted environment, shaped by geopolitical tensions, elevated economic uncertainty, climate-related risks and structural changes driven by technological innovation. ECB Banking Supervision plans to tackle these challenges by taking a forward-looking, risk-based approach, whereby we strategically allocate resources to focus on the most critical issues.^[2]

Looking ahead to the 2026-28 period, we have identified two key supervisory priorities.^[3] The first is to improve banks’ resilience to geopolitical risks and macro-financial uncertainties. The second priority is to ensure that banks strengthen their operational resilience and ICT capabilities. These priorities are designed to support a robust and adaptable banking sector that is well-equipped for the future.

Today, in line with the theme of this conference, I will focus on the first priority and give more details about two key initiatives: the thematic review on credit underwriting and the geopolitical reverse stress test. These efforts are fundamental in building a robust, adaptable banking sector that is ready to meet the challenges of tomorrow.

Credit underwriting – a supervisory priority

Credit underwriting lies at the heart of the credit risk management process and is the first – and arguably most critical – step when a bank grants a loan. From a broader macroeconomic perspective, sound credit underwriting is essential to ensure that financial resources are channelled to households and businesses that are economically viable and able to sustain investment over time. At a moment when Europe is seeking to relaunch a comprehensive investment agenda in strategic sectors, prudent and risk-sensitive lending standards are a precondition for durable, productivity-enhancing expansion.

Conversely, while excessively loose underwriting may inflate credit volumes in the short term, it increases the probability of borrower distress and default, thereby amplifying cyclical vulnerabilities. Over time, this can impair banks’ balance sheets, weaken confidence and have adverse effects on the real economy.^[4]

From a supervisory perspective, it is important to identify vulnerabilities early on. Applying robust criteria when granting loans helps banks ensure that potential future losses in the loan portfolio remain manageable. Funds will hence be allocated to households and businesses that are financially viable, thereby fostering investments that drive sustainable growth. It is therefore essential for banks to assess borrowers’ creditworthiness, expected financial positions and collateral adequacy.

Against this background, the ECB has identified credit underwriting as a supervisory priority for the coming years^[5], with a dedicated thematic review planned for 2026. This review will build on the ECB’s credit underwriting exercise conducted in 2019^[6], during which supervisors collected risk indicators from banks under the ECB’s direct supervision across all major credit portfolios. The findings highlighted areas for improvement to better align banks’ practices with supervisory expectations. The upcoming review presents an opportunity for banks to proactively enhance their underwriting frameworks, ensuring they are equipped to meet heightened scrutiny while promoting resilience and growth.

Let me now take a closer look at what this thematic review means for banks and for supervisors.

Credit underwriting – thematic review

Banks play a crucial role as financial intermediaries, channelling surplus funds from savers to individuals, businesses and entities that need capital. This flow of credit is essential for driving investment, supporting economic growth and building a stable and resilient economy. Supervisors recognise that sustainable bank lending is essential for the prudential soundness of banks and positively contributes to the wider economy.^[7] The objective of the upcoming thematic review on credit underwriting is not to limit lending or reduce credit availability, but rather to improve our understanding of new lending practices. While the demand for credit remains strong and we see no immediate signs of deteriorating lending standards, both supervisors and banks lack sufficient data to fully analyse emerging trends. By enhancing data collection and creating more consistent reporting across European banking supervision, this review will provide valuable insights into lending practices. Ultimately, it will help both supervisors and banks strengthen their risk management frameworks and promote sound credit practices.

At the same time, it is crucial that the data supervisors request from banks are not only useful for regulatory purposes but also provide insights for the banks themselves. This is a key focus of the upcoming 2026 thematic review on credit underwriting. One of its central goals is to ensure that the data collected can be used for benchmarking. The anonymised benchmarking results will then be shared with the banks, allowing them to assess their performance and positioning relative to peers covered by European banking supervision. These insights will enable banks to enhance their risk management practices and evaluate their approach to risk-taking and risk-reward against industry standards.^[8]

To support this effort, supervisors have already analysed a sample of banks’ internal management information packs on credit underwriting, used by banks for their internal risk monitoring. This analysis revealed significant variations in the level of detail provided, with many information packs focusing primarily on new lending volumes and basic key risk indicators, such as maturity, repayment type and interest rates. However, key risk indicators for measuring and monitoring the underlying quality of lending or a bank’s risk positioning compared with its peers were often insufficiently detailed.

One of the main reasons for these gaps is the lack of standardised definitions of new lending and of harmonised key risk indicators across European banking supervision. Greater harmonisation in these definitions and metrics would bring substantial benefits not only for supervisors, but also for banks, enabling them to monitor risk more consistently and benchmark themselves more effectively. This convergence would be instrumental in driving improvements in credit practices and fostering a stronger, more resilient banking sector.

In summary, this thematic review reflects our commitment to next-level supervision and simplification. Its purpose may go beyond a single exercise in 2026, we need to see the results first and engage with industry on outcomes. Against the backdrop of rising geopolitical risk and competitive pressures, we want to assess the credit quality of new loans and to use harmonised data to deepen our understanding of recent lending developments.^[9]

This exercise potentially lays the groundwork for a structural initiative that enhances risk monitoring, also because we are committed to reducing repetitive, one-off data requests. By standardising definitions of new lending and introducing harmonised key risk indicators tied to loan quality and risk, we can – over time – create a more consistent and insightful framework across European banking supervision. Besides supporting supervisors in their oversight, this would give banks valuable benchmarking tools and market intelligence, empowering them to refine their practices and strengthen resilience in the years ahead.

Geopolitical risk – a cross-cutting risk driver

In today’s fragile global environment, marked by heightened geopolitical tensions, shifting trade policies, debt sustainability concerns and rapid technological change, the likelihood of extreme, low-probability events has increased. Amid elevated uncertainty, this has widespread implications for economies, financial markets and banks. This challenging landscape calls for vigilance and resilience from banks, to ensure they remain prepared to withstand shocks while continuing to support economic activity.

Geopolitical risk is a cross-cutting risk driver that can have an impact on banks’ traditional risk categories, including credit, market, liquidity, business model, governance and operational risks. It can also affect banks through multiple channels, including financial markets, the real economy and the safety and security of banks’ operations. As a key driver of macroeconomic uncertainty, it remains at the centre of the ECB’s supervisory priorities for 2026-28. Resilience to geopolitical risks is arguably more critical now than ever before.

The ECB has launched several initiatives to address these growing challenges. We have introduced a framework for assessing the impact of geopolitical shocks on the banking system. The 2025 EU-wide stress test incorporated a scenario linked to geopolitical tensions, providing insights into how such risks could affect the sector. And in December 2025 we announced that we will conduct a thematic stress test specifically targeting geopolitical risk in 2026. This reverse stress test^[10] aligns with the ECB’s supervisory priorities for 2026-28 and aims to evaluate banks’ capacity to handle geopolitical shocks comprehensively. It will include a review of banks’ internal capital and liquidity adequacy statements, their funding planning processes, recovery plans and internal stress-testing frameworks. The goal is to encourage banks to identify which of their portfolios are most vulnerable to geopolitical events and assess the solvency impacts of tailored scenarios.

While the focus is primarily on how geopolitical risk would affect a bank financially – such as the impact on loan portfolios, trading books and profitability – the exercise also considers the implications of geopolitical exposures for non-financial risks, funding and liquidity. The reverse stress test gives banks the flexibility to explore multiple scenarios before defining those most relevant to their business models, avoiding a one-size-fits-all approach. This tailored approach to the stress test exercise ensures that the ambiguity inherent in geopolitical challenges is addressed effectively.

A distinct feature of reverse stress testing is the pre-defined target outcome. Rather than using scenarios that imply the business model becoming non-viable or a point where the institution can be declared failing or likely to fail, the 2026 thematic stress test will require each bank to identify the most relevant geopolitical risk events that could result in a depletion of at least 300 basis points in its Common Equity Tier 1 (CET1) capital during the three-year scenario horizon. The depletion target refers to the maximum depletion within the given time period, measured against the bank’s unstressed end-of-year 2025 CET1 ratio and aligned with the geopolitical risk narrative developed by the bank. It is based on the fully-loaded CET1 ratio, meaning that the shock generated by the scenario is applied to the restated, fully-loaded starting values.

To ensure proportionality and cost efficiency, the reverse geopolitical risk stress test will be embedded in the 2026 internal capital adequacy assessment process. Banks will therefore be able to largely rely on existing supervisory reporting frameworks and data collection templates.

Banks will be asked to fill in a dedicated questionnaire, which will be key to understanding the scenario design process, risk impacts and portfolio vulnerabilities. Answers are expected to be focused and concise, and banks should select the factors that, from their perspective, contribute most significantly to the results of the exercise. The questionnaire also offers banks an opportunity to explain how their available management actions can mitigate geopolitical shocks.

The Joint Supervisory Teams will provide each bank with a tailored report detailing the interpretation of their results, key attention points and feedback on submission quality. We will also share some benchmarks, which will allow banks to compare their approaches to geopolitical risk with market peers. This collaborative feedback will promote industry-wide learning and information-sharing.

Importantly, this exercise will not affect the Pillar 2 guidance, as it is primarily qualitative and part of the broader internal capital adequacy assessment process for 2026. Beyond identifying vulnerabilities, the reverse stress test allows banks to refine their systems and processes and learn how to better mitigate geopolitical risk. By fostering dialogue and the exchange of best practices, this exploratory exercise serves as both a supervisory tool and a platform for banks to strengthen their resilience collectively, ensuring they are well-equipped to face the challenges ahead.

Conclusion

To conclude, geopolitical fragmentation, rapid technological progress and the transition to a low-carbon economy are reshaping risk transmission channels and challenging traditional approaches to credit risk assessment. In this context, resilience can no longer be understood as a static balance-sheet attribute; it must be recognised as an active and evolving capability, grounded in sound underwriting and robust risk management.

The two initiatives I have discussed today – the thematic review on credit underwriting and the geopolitical risk reverse stress test – reflect this shift towards a more anticipatory supervisory paradigm. Both exercises seek to identify vulnerabilities, enhance transparency, improve comparability and foster learning across the banking system. By strengthening data quality, harmonising risk indicators and encouraging banks to explore tail-risk scenarios, these initiatives aim to support better internal decision-making while preserving banks’ essential role in financing households and businesses.

Ultimately, sound credit risk management is inseparable from the broader objective of sustaining confidence in the banking system. Prudent underwriting and credible stress-testing frameworks do not constrain lending; they underpin its durability by ensuring that credit expansion remains consistent with borrowers’ capacity to repay and with banks’ capacity to bear risks across the cycle.

Joseph Schumpeter once observed that banks are not mere intermediaries transferring existing purchasing power; they play an active role in creating it through credit allocation. This perspective underscores the importance of sound underwriting practices, as the quality of lending decisions ultimately shapes both financial stability and the economy’s capacity for sustainable growth.

In a world where shocks may originate from increasingly diverse and unpredictable sources, the ability to anticipate, adapt and learn becomes the defining feature of robust banking systems. Strengthening credit underwriting and deepening the understanding of geopolitical risk exposures are therefore essential building blocks for a more resilient European banking sector.