Donnery highlights geopolitical, digital risks for banks

Sharon Donnery, Member of the Supervisory Board of the ECB, outlined key risks to European financial stability, including geopolitical tensions, digital transformation, and the need for timely remediation of supervisory issues.

Geopolitical and digital challenges ahead

Sharon Donnery, Member of the Supervisory Board of the ECB, outlined three key priorities for European banking resilience: strengthening against geopolitical risk, ensuring timely remediation of supervisory issues, and implementing sound digital transformation strategies, including AI.

She stressed that despite past resilience, banks must not be complacent.

Geopolitical risk demands a deep understanding of exposures across the real economy, financial markets, and operational security, impacting credit and market risk.

The SSM's ongoing reverse stress test for geopolitical risk requires banks to model scenarios causing a 300 basis point capital depletion, aiming to foster individual bank capabilities in scenario planning.

Results are anticipated later in the summer.

Donnery also highlighted the rapid pace of digitalization, cyber resilience, and AI, stressing banks' need to address vulnerabilities, particularly under the Digital Operational Resilience Act (DORA).

SREP reforms and suptech integration

The ECB has reformed its Supervisory Review and Evaluation Process (SREP) and Pillar 2 requirement (P2R) methodologies for simplicity, clarity, and transparency, aiming for quicker bank feedback.

Donnery affirmed "constrained supervisory judgement" remains central, backed by internal quality assurance and benchmarking.

The goal is a direct link between capital requirements and risk assessment, avoiding Pillar 1 and Pillar 2 overlaps.

The ECB's supervisory model integrates horizontal expert teams with vertical Joint Supervisory Teams (JSTs) and on-site inspectors, combining bank-specific perspectives with specialized expertise.

The "next-level supervision" program further improves coordination and leverages suptech tools to streamline processes, freeing supervisors for core matters and emerging risks.

Proportionality's double-edged sword

The debate on raising the Basel rules threshold for smaller banks highlights the inherent tension between simplification and financial stability.

While proportionality aims to ease regulatory burden, the risk of inadvertently creating systemic vulnerabilities, as seen with past regulatory adjustments, remains a critical concern.

Supervisors must carefully balance tailored frameworks with robust oversight to prevent future crises.