Donnery backs simpler supervision but defends capital safeguards
Sharon Donnery, a European Central Bank (ECB) Supervisory Board member, backs simpler banking supervision while preserving resilience. At the IIF colloquium in Frankfurt, she defended regulatory backstops and risk-based supervisory discretion.
Less duplication, not less protection
Donnery supported the Financial Stability Board's (FSB) draft modernisation principles, arguing that reforms must preserve banks' resilience while removing unnecessary costs.
ECB proposals include revisiting mandatory internal model reviews at least every three years, coordinating inspections to avoid duplication and simplifying follow-up on less severe findings.
For small and non-complex banks, proposals envisage less frequent assessments where risks permit and greater reliance on supervisor-led stress tests.
She defended both the leverage ratio and output floor as complementary safeguards against underestimated risks.
The Governing Council endorsed the ECB simplification task force's recommendations in December 2025.
Risks do not respect boundaries
Geopolitics, public debt, climate change and cyberattacks require supervision to capture interacting risks and cross-sector exposures, Donnery said.
Debt-funded artificial intelligence investment and opaque private credit can expose banks through both funds and borrowers.
The ECB's reverse stress test found some banks projected limited liquidity stress despite capital losses.
Its Q3 2026 lending survey attributed tighter corporate credit standards mainly to risk perceptions and lower risk tolerance, rather than capital constraints.
Simplification must earn its case
Donnery's test is whether reform improves prudential outcomes or lowers costs while preserving resilience.
She argued that visible compliance costs must not outweigh harder-to-measure protection against distress.
Reforms require evidence, assessment of their combined effects and checks after implementation.