Supervisory risk appetite, efficiency and effectiveness

Banks face a rapidly evolving risk landscape shaped by geopolitical shifts, technological disruption, and climate-related threats, requiring supervisors to adapt their approach. The ECB’s new strategy focuses on three pillars: prioritising material risks, streamlining supervisory processes, and ensuring timely corrective action. This replaces a rigid compliance-focused model with a more dynamic framework that balances risk tolerance with targeted oversight.

Supervisors are explicitly increasing their risk tolerance through a dedicated framework, allowing them to de-prioritise lower-risk areas without compromising safety. This active judgment enables more efficient use of resources while maintaining focus on systemic vulnerabilities. The shift acknowledges that zero-risk tolerance is unsustainable in a complex environment, but stresses that de-prioritisation is a deliberate supervisory choice, not a passive omission.

Efficiency improvements are central to the ECB’s strategy, with initiatives like the Next Level Supervision programme reducing duplication and streamlining procedures. Over 100 supervisory guidance documents have been revised or discontinued, and approval timelines for securitisations and capital decisions have been significantly shortened. Digital tools and AI are being deployed to accelerate assessments, aiming to deliver the same safety standards with less procedural burden.

Effective supervision hinges on ensuring banks address identified risks promptly and durably, not just detecting them. The ECB emphasises the need for proportionate, time-bound remediation paths and escalation to enforcement when necessary. Qualitative measures, including governance reforms and business restrictions, are used alongside capital requirements to tackle root causes of weaknesses, preventing recurring issues.