Donnery: Supervision adapts to complex risk landscape
Sharon Donnery, Member of the Supervisory Board of the ECB, emphasized the critical role of banking supervision in maintaining public trust. Speaking in London, she outlined how supervision must modernize to address an increasingly complex and interconnected risk environment while ensuring banks remain safe and resilient.
Resilience meets complex risks
Modern societies depend on trust in banks as an essential infrastructure, akin to electricity or water.
Sharon Donnery highlighted this foundational role, stating that banking supervision's objective must remain constant: ensuring banks are safe, sound, and resilient.
While the methods of supervision must modernize, the core purpose of sustaining public confidence is paramount.
She noted that the euro area banking sector entered the current period of heightened uncertainty from a position of strength, with an average Common Equity Tier 1 ratio close to 16%, a return on equity near 10% in 2025, and a historically low non-performing loan ratio of 2.2%.
However, Donnery warned against complacency, emphasizing that today's balance sheet indicators do not necessarily reflect tomorrow's risks.
Shocks can transmit with a lag, often non-linearly, in an environment of geopolitical tensions, trade fragmentation, energy price pressures, market repricing, and rising cyber threats amplified by artificial intelligence.
The main concern is how multiple shocks interact and amplify each other, testing the system's weakest links.
From geopolitics to cyber threats
Donnery detailed the multi-faceted risk landscape, identifying geopolitical risk not as a separate category but as a cross-cutting driver impacting credit, market, liquidity, operational, business model, and governance risks.
She highlighted credit risk as a key area, noting that higher energy costs, trade disruption, and interest rates could weaken firms and households, potentially increasing provisioning needs and credit losses.
The speech also addressed vulnerabilities in non-bank financial intermediation, where liquidity mismatches and opaque exposures can amplify market stress and transmit shocks back to banks.
Private credit, though relatively contained, is growing strongly, posing challenges for banks in aggregating overlapping exposures.
Furthermore, cyber and operational resilience are increasingly central, with AI enabling faster exploitation of vulnerabilities.
Donnery stressed that supervisors must identify these weakest links early and ensure banks take action to remain resilient under stress.
Modern supervision: Stronger, not weaker
Donnery's speech is a crucial reminder that banking resilience is a public good, not merely a regulatory burden.
It firmly rejects the notion that simplification should equate to weaker prudential standards, instead advocating for a more focused, forward-looking, and effective supervisory framework.
This perspective is vital for ensuring financial stability in an era where risks are increasingly complex and interconnected, demanding constant adaptation rather than a rollback of protections.