Making banking simple: one market, one rulebook

Keynote speech by Sharon Donnery, Member of the Supervisory Board of the ECB, at the Handelsblatt Jahrestagung Bankenaufsicht

Frankfurt am Main, 29 April 2025

Introduction

Thank you very much for the kind invitation to speak at this year’s annual Handelsblatt conference on banking supervision.^[1] It’s a great pleasure to be here.

The world faces a host of geopolitical, technological and economic uncertainties. Today, I want to reflect on the shared responsibility of supervisors, policymakers and banks to navigate this increasingly uncertain environment.

I will begin with a brief overview of the risk landscape as we see it. I will then talk about bank boards and their responsibility to steer their institutions through these conditions. Finally, I will share some thoughts on how supervisors, regulators and bankers can help reduce unnecessary complexity – without compromising resilience.

To use a quote often attributed to Albert Einstein: “Everything should be made as simple as possible, but not simpler.”

Risk landscape

Last week, policymakers from around the world gathered in Washington, DC for the Spring Meetings of the World Bank Group and the International Monetary Fund (IMF). A clear consensus emerged: the economic and financial outlook has rarely felt more uncertain and more difficult to navigate.

In its Global Financial Stability Report published last week^[2], the IMF argues that global financial stability risks have increased significantly in the wake of tighter financial conditions and the elevated uncertainty surrounding economic and trade policy.

In recent months we have indeed witnessed a significant surge in geopolitical and policy uncertainty, which was already unusually high.

This uncertainty affects several crucial economic policy areas, including trade, regulatory and fiscal policies. Increasingly protectionist tendencies are a major concern and are having negative effects on global growth, inflation and asset prices.

Markets have become highly sensitive to tariff-related news, which could lead to prolonged periods of heightened volatility and a fragile market environment. While recent repricing has alleviated concerns about high valuations to a certain extent, downside risks are still present. Financial markets – especially equity markets – remain vulnerable to sudden and sharp adjustments, with valuations and risk concentration still relatively high despite recent market drawdowns.

In the euro area, the balance sheet fundamentals of firms and households have improved in recent years. However, trade tensions, high funding costs and weak growth present significant challenges.

An escalating trade conflict could heighten corporate credit risk and affect the profitability of firms, particularly in tariff-sensitive sectors such as the steel and automotive industries. And despite their solid asset quality, euro area banks may face an increase in non-performing loans and provisioning needs, with more pronounced effects for banks heavily exposed to sectors that are reliant on trade with non-EU countries.

Fortunately, banks remain well-positioned to absorb further deteriorations in asset quality, thanks to their solid profitability and robust capital and liquidity buffers. But this is no time for complacency.

In a world fraught with geopolitical tensions and persistent economic uncertainty, it is essential that banks continue to build resilience against macro-financial shocks. One of our supervisory priorities for 2025-27 is to ensure that banks strengthen their credit risk management frameworks so they can detect early signs of asset quality deterioration and maintain prudent levels of provisioning.

Sound credit risk management starts with sound underwriting. History has shown that weak loan origination standards can lead to a build-up of non-performing loans – something we must avoid repeating. Banks need to demonstrate that they can properly assess the risks they take when extending new credit.

Responsibility of bank boards to navigate uncertainty

Bank boards have a crucial role to play in steering institutions through such periods of uncertainty. That is why management body effectiveness has been a key focus for ECB Banking Supervision in recent years, both in terms of ongoing supervision and from a fit and proper perspective.

The ECB’s final Guide on governance and risk culture^[3], which will be published in the coming months, clarifies our supervisory expectations in that regard and provides examples of existing good practices. The Guide emphasises that the ability of bank boards to navigate uncertainty depends not only on formal governance structures, but also on behavioural aspects, such as how board members communicate and their capacity to exercise sound judgement, remain open to learning and demonstrate resolve in challenging situations.

The responsibilities of management bodies extend well beyond maintaining short-term profitability. Boards play a central role in setting a bank’s strategic direction and ensuring its resilience in the face of structural shifts, from geopolitical fragmentation and digital transformation to the accelerating impacts of climate change. Effective governance requires forward-looking engagement with the bank’s risk profile and active oversight of how risks are identified, assessed and managed across all lines of defence. And in today’s world, effective risk management means continuously monitoring evolving threats, including concentration risks, over-reliance on third-party providers for critical functions, such as cloud services, and broader operational vulnerabilities.

Strategic planning should be informed by rigorous scenario analyses that consider not only the direct impacts of external disruptions such as geopolitical tensions or failures in key technologies, but also second and third-order effects. These insights should feed into capital planning, business continuity arrangements and decisions on resource allocation. The goal should be not just to ensure compliance, but to make operational and financial resilience a fundamental part of the bank’s structure.

In this context, the oversight of outsourcing arrangements, particularly those with cloud service providers, has become a key area of focus. When outsourcing important functions, banks are expected to conduct detailed due diligence, ensure clear and enforceable contractual terms and maintain tested exit strategies. Our most recent annual horizontal analysis of outsourcing arrangements shows that around 50% of contracts that include cloud services cover critical activities, and providers are mainly located outside the European Economic Area.^[4] Responsibility for these arrangements cannot be delegated: the management body remains accountable for the continuity and integrity of critical functions, regardless of whether they are performed internally or by third parties.

Ultimately, the capacity of the board to provide informed, proactive and risk-aware leadership will determine a bank’s ability to navigate complex and uncertain environments. This requires both technical understanding and the behavioural competences necessary to create a governance culture that prioritises resilience, adaptability and creating long-term value.

Simplification

Let me now turn to how we can simplify banking supervision without compromising resilience. I will cover three different perspectives.

First, I will outline what policymakers can do to make the regulatory framework more coherent and less fragmented.

Second, I will speak about the role of supervisors and what ECB Banking Supervision is already doing to reduce unnecessary complexity.

And finally, I will come back to the role of banks themselves and the important contribution they can make towards a simpler and more effective regulatory environment.

The regulatory angle

The discussions around regulatory simplification can sometimes be unduly influenced by misconceptions or narratives that don’t capture the full complexity of the work involved in maintaining a prudent regulatory framework.^[5] Calls to “cut red tape” or “lighten the burden” may sound appealing, but they rarely offer a serious roadmap for reform. The challenge is not to regulate less, but to regulate smarter.

Banking is a complex business. And the financial system is a complex system. That complexity is not necessarily a flaw – it’s a reflection of how modern economies allocate capital, manage risk and support growth. But it is precisely this complexity that demands that regulation and supervision be sufficiently granular.

When we talk about simplifying regulation, we should think not in slogans, but in questions. There are three questions we should always be asking about proposed changes to the regulatory framework.

First, does the change actually simplify the regulation? For instance, does it increase transparency, make requirements easier to understand, or ensure operational compliance costs are proportionate to the size and risk profiles of specific institutions?

Second, does it bolster resilience in the financial system?

And third, does it advance the integration of the Single Market?

If the answer is “yes” on all three counts, then we are probably simplifying in the right direction.

Let me now examine each of these questions in more detail.

No one would argue that the regulatory framework is not complex, or that there is no room for improvement. Today’s regulatory framework is multifaceted, encompassing risk-based capital requirements, leverage ratios, large exposure limits, liquidity and funding ratios, resolution requirements and more.

This approach recognises that more than one metric is needed to fully capture the complex array of risks in the banking sector, and it was a key factor in ensuring the overall resilience of the global banking system during the spring 2023 market turmoil.

Yet we must acknowledge that the current framework is not the product of a single overarching design, but rather the incremental accrual of new objectives and tools over several decades – and, generally speaking, these changes have made the system increasingly complex.

As a brief aside, we should be realistic about where this complexity has come from. Regulations are developed in consultation with the public, and the banking industry has ample input. While politicians and regulatory authorities rightly introduced additional safeguards following the global financial crisis, the devil in the detail often reflects industry demands to accommodate so-called local specificities or calls to lower capital requirements in the name of increasing risk sensitivity.

Whatever its origin, excessive complexity has unwanted side-effects for banks, investors and supervisors.

Market participants’ ability to understand the consequences of the regulatory regime – for instance with regard to loss-sharing arrangements and supervisory restrictions when a bank’s solvency declines – can affect their willingness to invest in the banking sector and the remuneration they demand for accepting regulatory uncertainty.

Excessive complexity may also contribute to system-wide fragility in periods of acute stress if investors lose confidence in the informational value of banks’ regulatory disclosures.

And even in normal times, monitoring compliance with multiple regulatory metrics and understanding all their potential interactions can pose operational costs and challenges for banks and supervisors alike.

In my view, the operational costs of compliance need to be proportionate to the risks that regulations aim to address. From a conceptual perspective, proportionality and simplification are fundamentally intertwined.

Efficient and effective rules must be grounded in sound impact assessments and cost-benefit analyses.

This means that rules should reflect the diversity of the banks they apply to, taking into account their specific activities and risk profiles and their importance for the financial system and the wider economy.

Already today, the regulatory framework is not one-size-fits-all. For example, addressing the too-big-to-fail issue has been a core objective of post-crisis financial sector reforms, and this is reflected in European institutional and regulatory frameworks which hold systemically important banks to stricter requirements. Equally, since 2019 the Capital Requirements Regulation has allowed banks that qualify as “small and non-complex institutions” to benefit from less extensive reporting requirements, and other requirements have been simplified for them.

There may be scope for more proportionality in the European regulatory framework. But let me reiterate: rules should be as simple as they can be, but no simpler. Any efforts to simplify should remain fully aligned with the objective of achieving a full, timely and faithful implementation of Basel III.

This brings me to my second question: does the proposed change bolster resilience in the financial system?

Having lived through the financial crisis as a supervisor in Ireland, I can say with absolute conviction: a regulatory race to the bottom is always a race that nobody wins. Deregulation may appear to offer short-term relief but it inevitably sows the seeds of future crises. That is why we must never sacrifice the resilience that was so hard-won in the aftermath of the global financial crisis – neither in the name of alleged competitiveness, nor under the banner of simplification. This is a red line. And it must remain one.

Now, to the third question: does it advance the integration of the Single Market?

I remain convinced that much of the complexity in the European regulatory framework stems from national fragmentation. The goal should not be to lower regulatory standards, but to reduce complexity by aligning and harmonising rules across Europe.

The European Commission’s communication on the savings and investment union^[6] offers a clear roadmap, which should be implemented swiftly.

Completing the banking union, including a European deposit insurance scheme, and building a fully integrated capital markets union would help remove remaining barriers to market integration. This would not only strengthen the financial system’s resilience but also enhance its capacity to support sustainable growth.

Financial markets would gain significantly from greater harmonisation, be it in corporate insolvency rules, accounting standards, securities laws or the quality and consistency of financial disclosures by EU corporations. To make progress in these areas, we should remain open to pragmatic solutions. One solution could be to introduce a 28th regime – a parallel, optional legal framework such as the one proposed by the European Commission in its Competitiveness Compass^[7] – that would offer a practical and welcome intermediate step towards deeper harmonisation across the EU.

Let me tackle a potential criticism head-on – the argument that European harmonisation only benefits large, internationally active banks. This is not true.

Certainly, deeper integration may mean that local players are subject to increased competition from overseas. And while smaller, domestically focused banks may benefit less from economies of scale, in some cases they still have to bear the full weight of regulatory complexity. Ironically, in the absence of clear and consistent EU-level guidance, national authorities sometimes apply overly cautious or duplicate requirements in the form of gold-plating.

Rather than protecting local players from international competition, we should ensure harmonised and proportionate requirements at EU level to facilitate smaller banks’ ability to compete with larger ones.

Completing the Single Market doesn’t force small banks to go cross-border. But it can give them the opportunity to expand, form partnerships or compete more easily. This can be beneficial on a strategic level, especially as technology is lowering the barriers to offering digital cross-border services and expanding the customer base.

Finally, even if a bank’s operations do not cross borders, its investors and counterparties often do. Harmonisation improves the integrity and credibility of the entire system, which translates into lower funding costs and more attractive investment conditions for all institutions, large and small.

The supervisory angle

I will now explain what ECB Banking Supervision is doing to contribute to a simpler framework.

Both policymakers and supervisors have a responsibility to ensure that harmonisation and level playing field considerations do not mean more bureaucracy. As supervisors, we are fully aware of that responsibility. We are entrusted with significant powers and it is our duty to use them wisely.

Internally, we set up an SSM simplification group back in 2018^[8] to simplify our decision-making processes. One of the outcomes was the delegation framework for routine ECB supervisory decisions. Over the years, we have made significant improvements to the way we conduct fit and proper assessments, how we make decisions on own funds and how we interact with banks via the IMAS portal. We have also enhanced transparency regarding our supervisory priorities and begun providing more detailed information about our planned supervisory activities, enabling banks to plan more effectively. All these initiatives have had a tangible impact on banks.

And we are committed to continuing this work. Because with great power comes great responsibility, not just to ensure stability but to make the system work better for everyone.

This is why, in 2022, we decided to ask a group of high-level experts to review the effectiveness and efficiency of our supervisory processes in relation to the Supervisory Review and Evaluation Process (SREP). The resulting reform of the SREP is a testament to this commitment, aiming to simplify processes while maintaining the resilience of the European banking sector.

While many elements of the reform make ECB Banking Supervision more efficient, we also expect to see concrete benefits for banks: faster decisions, better planning, better coordination of different supervisory activities, improved communication and better use of digital tools.

For example, a more risk-focused approach to qualitative measures will allow banks to focus on the most material deficiencies. The streamlined SREP decision template will help banks understand and address supervisory requirements and recommendations more clearly and efficiently. The SREP reform also involves making our methodologies more stable, which will allow banks to focus on new issues and emerging risks without needing to worry about evolving supervisory policies. This stability supports long-term planning and risk management.

Reporting is another area that is ripe for simplification.

The ECB is actively working to simplify reporting requirements through initiatives like the Banks' Integrated Reporting Dictionary and the Integrated Reporting Framework. These efforts aim to reduce the reporting costs for banks, improve data quality and standardise reporting obligations. We are also working together with the Single Resolution Board on a single liquidity reporting process that will allow us to achieve greater standardisation and, ideally, remove the need for ad hoc (national) data collections. We are continuously working to simplify data collection templates and improve an SSM-wide database for requests sent to banks that allows us to avoid overlaps and duplicate data collections.

Another example of simplification within the existing regulatory framework is the fast-track approval process for standardised securitisations. It shows what is possible when we work closely with the industry.

By building on this standardisation and making significant risk transfer transactions sufficiently simple, we can streamline processes and achieve real efficiency gains without compromising our focus on the risks that truly matter.^[9]

Looking ahead, we will continue to analyse our supervisory processes to see whether we can further simplify them without sacrificing quality, whether in relation to the approval of own funds, internal models, fit and proper assessments or licensing procedures.

The industry angle

The example of the simplified significant risk transfer approval process brings me to an important point: the shared responsibility of banks to contribute to a simpler framework.

The success of this initiative hinges on the active participation of banks. By adopting these standardised securitisation structures, banks can not only benefit from the efficiencies offered but also contribute to a more coherent and simpler regulatory environment. Embracing standardised transactions and engaging proactively with the fast-track approval process enables them to demonstrate their commitment to regulatory efficiency and resilience. This collective effort can lead to a reduction in complexity, making the regulatory framework more navigable for all stakeholders.

The same principle applies to internal models. While they may offer better risk sensitivity, their proliferation and complexity come at a cost – not only to the banks themselves but also to supervisors and the financial system as a whole.

Maintaining overly complex or fragmented model landscapes can absorb disproportionate resources and make risk management more complex. This is particularly true for internal models for small portfolios or portfolios with limited representative data. Banks should establish a comprehensive internal models strategy, including clear and well-defined criteria for choosing the appropriate approach for calculating their own funds requirement, thereby ensuring an efficient, consistent and holistic approach.

Building on this point more broadly, banks can also help keep the regulatory framework as simple as possible by refraining from requesting overly complex rules, especially if the resulting capital relief and other benefits would be minimal.

Conclusion

Let me conclude.

Addressing the complexities and uncertainties of today's financial landscape demands a concerted effort from supervisors, policymakers and banks.

Bank boards play a crucial role in guiding institutions through uncertainty by focusing on both formal governance structures and behavioural aspects. Effective governance involves proactive engagement with risk management and strategic planning to address threats such as geopolitical tensions and technological failures. Ultimately, boards must ensure resilience and adaptability by maintaining accountability and fostering a culture that prioritises long-term value creation.

We should aim to make the regulatory framework more coherent, reduce fragmentation across jurisdictions and align rules to foster an integrated Single Market. Simplification efforts should focus on enhancing transparency and proportionality and ensuring that regulations remain clear, practical and tailored to the diverse profiles of financial institutions.

As supervisors, we are committed to simplifying our framework by enhancing decision-making processes, improving communication and reducing reporting costs where possible. The aim is to achieve a more streamlined framework without sacrificing resilience. Banks have a shared responsibility to actively participate in these efforts by considering standard products and the simplification of their own structures, thus contributing to a more coherent and navigable regulatory environment.

By working collaboratively, we can build a more resilient and simpler financial system that not only withstands current challenges but is also well-equipped to navigate future disruptions.