Remaining vigilant in a changing risk environment

Keynote speech by Patrick Montagner, Member of the Supervisory Board of the ECB, at the S&P Global Ratings European Financial Institutions Conference

Paris, 1 October 2026

Ladies and gentlemen,

I would like to begin by thanking S&P Global Ratings for inviting me and giving me the opportunity to bring this conference to a close.

This morning’s discussions covered a number of significant transformations affecting the European financial sector, including the expansion of private credit, artificial intelligence and changes in the economic environment.

I would like to share a few additional observations.

Today, it is clear that European banks are resilient. Their profitability has improved significantly, their capital and liquidity ratios are robust and their asset quality remains broadly satisfactory.

This is in stark contrast to the situation that prevailed on the eve of the great financial crisis in 2008. It reflects the considerable efforts made by banks, public authorities and regulators over nearly two decades to strengthen banks’ balance sheets and risk policies, notably through reforms whose core elements must be preserved.

But while European banks are now reporting healthy profitability levels, it is worth remembering that their return to levels comparable to those of some of their international peers is relatively recent. This gap cannot be explained solely by the persistent fragmentation of the European banking market, even though this does inevitably weigh on the efficiency and growth of banking groups. The gap also reflects a macroeconomic environment in Europe that has been less dynamic for a long time, coupled with several years of very low, even negative, interest rates, which have weighed on intermediation margins. The recent rise in rates has contributed to the recovery in profitability.

Banks should therefore avoid taking these recent results for granted. Changes in the interest rate environment, an economic slowdown or an increase in the cost of risk could change the outlook. This is compounded by the increasing materialisation of climate and nature-related risks. The exceptional summer experienced across Europe in 2026, characterised by extreme temperatures and exceptionally low water levels on the Rhine and the Danube, has had significant human and economic consequences. Banks should take advantage of the current period to further strengthen their resilience and prepare for the future.

So while we can have confidence in the European banking sector’s ability to withstand shocks, this resilience should not lead to complacency.

Banks’ resilience should not serve as a pretext for complacency – risks still remain

One significant risk for European banks could actually be excessive optimism, which is something we have seen before. The history of financial crises teaches us that vulnerabilities can build up when earnings and profitability are high, defaults are rare and liquidity seems to be abundant.

In 2006 and 2007 many observers highlighted the strength of major financial institutions, and markets were broadly confident. Yet only a few months later, the US mortgage crisis revealed vulnerabilities that the prevailing consensus had largely underestimated.

This is not necessarily to suggest that banks are currently vulnerable. As I just mentioned, they are much better capitalised and better prepared than they were back then. I merely want to highlight that risks do not disappear when they become less visible. They may evolve, migrate to new stakeholders or accumulate in certain portfolios.

Banking relies on the confidence that depositors, creditors and markets place in banks. It is essential to attract deposits, access markets and finance the economy. But excessive confidence among banks about their own resilience or their ability to manage risks is a source of vulnerability. It can lead to lending standards being loosened, future liquidity needs being underestimated or exceptionally high profitability being seen as sustainable.

The current environment therefore calls for a balanced assessment. On the one hand, European banks are highly resilient. On the other, they operate in a more fragmented world, characterised by more frequent shocks that are sometimes harder to model.

Geopolitical tensions can affect banks through multiple channels: energy and commodity prices, inflation, supply chains, financial markets and even the repayment capacity of companies exposed to international markets. They are also associated with growing cyber and hybrid threats that could disrupt critical infrastructure, technology providers and banking services.

The heightened funding needs of many governments and reduced fiscal headroom could also make markets more sensitive to shifts in sentiment. In an environment of elevated valuations and significant concentration, a reversal in investor sentiment could spread rapidly.

Finally, the links between banks and non-bank financial intermediaries continue to develop. Private credit, in particular, can play a useful role in diversifying the sources of funding available to the economy. However, it can also give rise to leverage effects and interconnections with the banking system that prove hard to measure and capture comprehensively.

None of these factors in isolation point to an impending crisis. But how they interact merits our full attention.

Potential weaknesses should be detected before they materialise

A supervisor’s role is to examine all these weaknesses and use this favourable period to encourage banks to anticipate and remedy them, rather than wait until a shock brings them to the surface.

Our first area of focus is credit risk management.

The aggregate quality of bank assets remains sound, but we are seeing some signs of deterioration in certain segments and countries. The cost of risk has also increased for some institutions. These developments are under control but merit our close attention.

Experience tells us that future losses often depend on decisions taken to grant credit when economic conditions are still favourable.

We therefore expect banks to uphold very strict procedures when granting loans. We also expect prudent collateral valuations and pricing that adequately reflects the underlying risks. We will therefore continue our work on bank practices for granting loans and will back it up with horizontal analyses, targeted reviews and on-site inspections.

The same logic applies to capital planning. Banks must factor sufficiently severe scenarios into their projections, take changes in their portfolios into account and accurately measure the effect of new prudential requirements. They must continue to make distribution decisions in line with their risk profile and future needs.

In this respect, our recent exercise on geopolitical risk provided us with some useful information. This reverse stress test taught us about the quality of banks’ scenarios, their understanding of transmission channels and the credibility of their management measures. In particular, it reminded us that effective preparation cannot be based on one single scenario alone, as geopolitical tensions can take many different forms and combine credit losses with market movements, liquidity tensions and operational disturbances.

Finally, banks must also continue strengthening their management of climate and nature-related risks. The extreme events we have seen in Europe demonstrate that these risks are already materialising and can affect asset valuations, supply chains and the repayment capacity of borrowers. While banks have made substantial progress in recent years, there are still shortcomings, particularly in terms of assessing physical risks and integrating them into their risk management procedures.

Our second area of focus is operational and technological risk. Digitalisation offers banks and their customers considerable advantages. It also creates new dependencies in terms of IT infrastructure, the cloud, third-party service providers and sometimes complex subcontracting supply chains.

An IT outage can quickly affect millions of customers. A weakness at one big provider can simultaneously affect several banks. The ability to maintain critical services must therefore be considered as a central component of a bank’s resilience.

Artificial intelligence can shorten the time taken between identifying an IT weakness and exploiting it. Recent examples provide evidence of this acceleration in cyberattack capacities using what are now called frontier models. These models force banks to become more vigilant and strengthen management of their vulnerabilities and their capacity to respond to an attack. In this context, banks can no longer take months to fix shortcomings.

At the same time, artificial intelligence does offer the banking sector considerable potential. It can improve certain processes, make it easier to analyse large volumes of data and enhance the services offered to customers. However, it has to be used as part of a clear strategy. Banks’ management bodies need to understand the most important use cases as well as the associated risks and technological dependencies. They must make sure that responsibilities are clearly defined, that data are of sufficiently good quality and that systems can be monitored throughout their entire life cycle.

Lastly, I would like to stress the importance of data quality and risk reporting. When a shock occurs, a bank’s management team should be able to quickly identify where exposures lie, how these exposures develop and what decisions need to be taken. Some banks do suffer from significant shortcomings in risk data aggregation and reporting. These shortcomings can limit their ability to deal with a crisis, even if their aggregate ratios appear to be robust. We will therefore continue to ask them to make tangible progress while establishing clear lines of responsibility and credible timeframes.

Conclusion

In conclusion, European banks currently have solid foundations thanks to the significant efforts made. This is a plus for Europe’s economy.

Nevertheless, the risk environment remains very uncertain. Geopolitical tensions, macrofinancial vulnerabilities, technological transformations and their interconnections with the non-bank sector may result in combined effects that are difficult to anticipate.

Favourable periods offer the best opportunity to prepare for future shocks, without forgetting the lessons learned in the past. That is why it is vital that we do not dismantle the years of work that produced the current regulations on the grounds that today’s situation proves that they are of no use, or are even detrimental, as some would claim. The ECB supports the need to eliminate redundancies, remove ambiguities, address inconsistencies and simplify supervisory approaches. But we cannot simply pay lip service to preserving the banking sector’s resilience. Instead, it should underpin our thinking and help guide legislators to proceed with caution.

Confidence will always remain essential to a bank’s functioning. This confidence must be based on a clear assessment of the risks, sound governance and a proven ability by banks to deal with unexpected events, as well as a modernised approach to supervision by the ECB that is able to rely on robust and consistent regulation.

Thank you for listening.