ECB Supervisory Chair Buch highlights banking risks and digital challenges

Claudia Buch, Chair of the Supervisory Board of the European Central Bank, discussed current banking sector risks, digitalization, and supervisory priorities in an interview with Milano Finanza. She emphasized the need for prudence despite good profitability and highlighted emerging challenges from AI and cyberattacks.

Prudence despite strong profitability

European banks currently exhibit strong profitability and robust capitalisation, with non-performing loans (NPLs) remaining at low levels.

However, Buch cautioned against complacency, citing significant macroeconomic uncertainties.

She urged banks to leverage their current strong performance to bolster long-term resilience, particularly in capitalisation, ICT infrastructure, and operational capabilities.

Buch noted that while aggregate NPLs are near a decade low at roughly 2 percent, specific sectors like commercial real estate (CRE) and SME lending show small increases.

Geopolitical risks and heightened uncertainty have not yet fully manifested on bank balance sheets.

The Single Supervisory Mechanism (SSM) is actively assessing credit risk and banks' lending practices, emphasizing that underwriting standards serve as a crucial leading indicator for future NPL trends.

Buch highlighted a new project to gather better data on corporate lending standards, aiming for streamlined and proportionate reporting.

Navigating the digital frontier

Digitalisation is reshaping the banking landscape, fostering competition and innovation but also increasing incentives for risk-taking.

The euro area's over 50 digital banks require sound risk governance to manage their rapid growth.

While digital models and AI enhance efficiency, they heighten exposure to cyberattacks, which have roughly doubled recently.

Buch stressed the importance of robust cyber resilience and swift recovery mechanisms, noting the Digital Operational Resilience Act (DORA) improves oversight of outsourced functions.

The impact of AI on banks' efficiency, risks, and potential biases in lending decisions is a key supervisory priority for the SSM over the next three years, requiring deeper understanding and appropriate risk control frameworks.

A balancing act for supervisors

Buch's interview underscores the complex balancing act facing banking supervisors in a rapidly evolving financial landscape.

While current bank health is robust, the swift pace of digital transformation introduces novel, systemic risks that demand proactive oversight and enhanced data collection.

The emphasis on long-term resilience, prudent capital planning, and data-driven supervision is critical for navigating an increasingly uncertain global environment.