Banks in a changing global landscape

Contribution by Anneli Tuominen, Member of the Supervisory Board of the ECB, for the Eurofi Magazine

Warsaw, 8 April 2025

While European banks have been resilient to large external shocks in recent years, there are unfortunately few signs of a “steady state” being within reach anytime soon in an environment marked by lingering uncertainty. At the global level, geopolitical risks remain high, shifts in macroeconomic policies by major players are possible, and regulatory uncertainties persist concerning the outlook for the full implementation of the Basel III reforms in key jurisdictions outside the EU. In Europe, the banking union remains incomplete as its third pillar of common deposit insurance is still missing, and progress on reinforcing our crisis management system (on the basis of proposals tabled by the Commission in 2023) has stalled. However, the recent strength that banks have shown in crisis episodes has led some commentators to question whether these improvements are really needed, instead arguing that capital requirements should be relaxed so that banks can be more competitive in financing the economy.

In the remainder of this contribution, I will outline how we can deal with these challenges and thereby reconcile policy objectives which may at first appear to conflict with each other.

Dealing with geopolitical risks and macroeconomic uncertainty

Geopolitical risks have the potential to affect both traditional and new risks in a multifaceted way that cuts across established categories. Potential changes in macroeconomic policies by large global actors could amplify such vulnerabilities, for example by compounding credit risks faced by banks in the context of a more sluggish economic growth outlook. Rising geopolitical risks in recent years have also been associated with an increase in reported cyber incidents. This has put banks’ operational resilience and risk management frameworks under the spotlight.^[1]

We are aware that geopolitical risks are difficult to measure, especially in an environment of uncertainty. But we are asking banks to make an effort to take such risks into account in their scenario planning through the channels which they consider most relevant for their own business, and to make contingency arrangements for their risk management and governance practices accordingly. This also suggests that the principle which has served banks well thus far, which is that robust capitalisation is the first line of defence to guard against unforeseen external shocks, will continue to remain valid going forward.

Fostering a more efficient supervisory and regulatory framework

Several efforts are underway to streamline parts of the overall supervisory and regulatory framework in order to reduce its complexity. Last year, we announced a number of reforms to our annual bank health check to ensure that it is more risk-based.^[2] With this guiding principle in mind, we are now looking at which other supervisory processes could benefit from a similar approach to make them more effective. The European Commission recently put forward proposals to simplify corporate sustainability reporting amongst others (the “Omnibus” packages).^[3] The ECB is contributing with measures to harmonise banks’ statistical reporting. We have developed a database to keep track of ad hoc reporting requests to banks, and joint initiatives are underway with other European and national authorities as well as with the banking industry which should bear fruit in the medium term.^[4] The European Banking Authority is also looking to create a task force on simplification to carry out an overall review of the single rulebook.

While there is scope for additional regulatory streamlining, this should not come at the expense of banks’ overall resilience. We should avoid repeating past mistakes where banks were often at the root of, or contributed to the amplification of, crisis episodes. Rather than debating the purported need to lower banks’ capital requirements, which I would not favour, we should instead focus on boosting competitiveness through a more integrated system with harmonised requirements. This is also why it is important to complete the banking union as originally envisaged.

Conclusion

In a changing global landscape, the current debate on how to improve the growth and competitiveness of the European economy is welcome. Recent developments suggest that increased spending in defence will be needed going forward, which will come on top of the large financing needs related to the green transition. There are clear limitations as to what banks can reasonably be asked to do in these domains, which is why it remains critical to advance plans to establish a capital markets union. It is a good time for all stakeholders concerned to further buttress the resilience of the European financial sector.