Buch: Geopolitical, cyber risks challenge banks, reform needed

Buch highlighted that geopolitical risks, including the war in Iran and increased tariffs, are a serious priority for banking supervision, having already materialized.

She noted close collaboration with banks to assess implications for credit risk, energy prices, and supply chain disruptions, urging banks to remain highly vigilant.

The Financial Stability Board's warning on cyber risk is fully aligned with the SSM's view, following a cyber resilience stress test two years prior.

This test provided valuable insights and fostered knowledge sharing among banks, particularly concerning IT outsourcing vulnerabilities.

With advanced AI models, the capabilities for both protection and attack have increased, necessitating banks to prioritize cyber defenses and strengthen resilience against a rapidly evolving threat landscape.

Buch stressed that boards must treat cyber resilience as a strategic priority, allocating adequate resources to address these evolving threats.

Reflecting on over a decade of European banking supervision, Buch acknowledged the system's increased complexity despite its effectiveness in harmonizing standards and restoring confidence.

The banking sector is now much better capitalized, enabling its contribution to lending and growth.

To address complexity, the SSM has implemented reforms, streamlining supervision while safeguarding resilience.

Current efforts include reviewing and clarifying guides for banks, discontinuing obsolete ones, and focusing on proportionality, especially in reporting.

Buch noted that the ECB Governing Council has also recommended legislative changes for simplification.

While only some of Mario Draghi's recommendations have been implemented, the ongoing supervision reforms are inspired by these discussions, aiming to simplify without weakening resilience.

She confirmed that geopolitical tensions have not yet reflected in weaker credit quality, with non-performing loans around 2%.

However, weaker growth forecasts and rising corporate insolvencies are being monitored through reverse stress tests to identify future vulnerabilities.

Buch also called for greater transparency and better reporting in private credit markets, where some banks show room for improvement in risk management, to address potential systemic risks from leverage and interconnectedness.