Machado highlights supervisory focus on credit underwriting and geopolitical risks
Pedro Machado of ECB Banking Supervision outlined key initiatives for credit risk management, focusing on a thematic review of credit underwriting and a geopolitical reverse stress test. Speaking at a PWC conference in Frankfurt, he detailed the SSM's forward-looking approach to banking supervision.
Strengthening credit underwriting for sustainable growth
ECB Banking Supervision has identified credit underwriting as a key supervisory priority, with a dedicated thematic review planned for 2026. This review aims to enhance understanding of new lending practices and ensure financial resources are channeled to economically viable households and businesses.
Building on a 2019 exercise, the upcoming review will focus on improving data collection and harmonising key risk indicators across European banking supervision.
The objective is not to limit lending but to provide valuable insights and benchmarking results to banks, enabling them to refine their risk management frameworks.
Supervisors have already noted significant variations in banks' internal information packs, often lacking detailed metrics on loan quality and risk positioning.
Greater harmonisation in definitions of new lending and risk indicators is crucial for consistent monitoring and effective benchmarking, fostering a stronger and more resilient banking sector.
Stress-testing for geopolitical shocks
Geopolitical risk is a critical, cross-cutting driver impacting traditional risk categories like credit, market, and liquidity.
Amid heightened global uncertainty, the ECB has launched initiatives to bolster banks' resilience, including a thematic stress test specifically targeting geopolitical risk in 2026. This reverse stress test will require banks to identify geopolitical events that could deplete their Common Equity Tier 1 (CET1) capital by at least 300 basis points over a three-year horizon.
The exercise, embedded in the 2026 internal capital adequacy assessment process, allows banks to tailor scenarios to their business models, promoting industry-wide learning and best practice exchange.
Proactive supervision, enduring challenges
The initiatives discussed signal a crucial shift towards a more anticipatory supervisory paradigm, moving beyond static balance-sheet resilience.
While vital for enhancing transparency and comparability, their long-term impact hinges on effective implementation and industry-wide adoption of harmonised standards.
The ongoing challenge remains balancing robust oversight with fostering an environment conducive to sustainable lending and economic growth.