ECB pushes banking market integration and proportionate supervision in Europe

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ECB banking market integration

Highlights

ECB's Frank Elderson supports raising the simplified regulatory threshold from €5 billion to €10 billion in assets, bringing 150 more banks into lighter compliance regimes.
Elderson argues market fragmentation, not regulation, mainly impedes European banks' competitiveness, calling for completion of the Single Market, banking union, and a European deposit insurance scheme.
ECB expects banks' concrete AI-related cyber defence action plans by end of October, highlighting risks from model dependence, data quality, and cloud concentration.

ECB sets out case for simpler, risk-based rules

As reported by the European Central Bank, Executive Board member Frank Elderson says the costs of post-crisis regulation remain justified because the financial and social damage caused by the 2008 crisis far exceeded the burden imposed on banks. He says European lenders are now better capitalised, hold stronger liquidity positions and are, on average, more profitable than they have been for many years.

Elderson says supervision has become more complex partly because banks differ widely and face a broader set of risks, including geopolitical tensions, cyber threats, climate and nature risks, and artificial intelligence. He argues that complexity should not be pursued for its own sake, adding that supervisors have already reduced reporting obligations and accelerated processes, while maintaining that simplification must not become deregulation.

On proportionality, he says the current framework already gives lighter treatment to small and non-complex institutions, which report only up to 30% of the data required from large banks. He adds that raising the threshold for that category from 5 billion euros in total assets to 10 billion euros could bring about 150 more banks into the simplified regime, while longer intervals between regulatory reviews and greater reuse of existing stress-test data could also ease compliance demands for smaller lenders.

Elderson says any further simplification must remain limited by each bank's risk profile and must not weaken core prudential standards such as governance, risk management, capital, liquidity and resilience. He also says a more proportionate approach would allow supervisors to concentrate resources on the most significant threats to financial stability.

Fragmentation, AI and non-bank linkages shape competitiveness risks

Elderson identifies fragmentation, rather than regulation itself, as the main obstacle to the international competitiveness of European banks. He says the absence of a fully integrated banking market prevents lenders from capturing economies of scale, improving capital and liquidity allocation, and expanding cross-border activity across the European economy.

He calls for completion of the Single Market, the savings and investments union and the banking union, including a European deposit insurance scheme. In his view, differences in legal frameworks, insolvency regimes and consumer protection rules continue to make cross-border banking unnecessarily costly, at a time when Europe needs major investment to address the energy transition, climate and nature challenges, and demographic pressures.

On global regulation, Elderson says Basel III should remain the common benchmark for banking rules, arguing that banks should compete on efficiency, innovation and risk management rather than on weaker standards. He warns that loosening Pillar 1 requirements would not remove risk, but could instead shift more of the burden from regulation to supervisory intervention.

He also says AI creates both opportunities and new vulnerabilities for banks, particularly in cyber security, model dependence, data quality and concentration risk tied to cloud providers. Elderson notes that the ECB asked banks in July to reassess cyber defences, IT budgets and staffing linked to AI-related threats, and expects concrete action plans by the end of October.

Beyond banks' direct use of AI, he says supervisors are closely watching connections between lenders and non-bank finance, including private credit. While market-based finance can help fund Europe's strategic priorities, he warns that risks do not necessarily leave the banking system when lending moves outside it, because hidden concentrations can build through overlapping exposures between banks, private credit providers and corporate borrowers.

In our earlier article on the Bank of England’s call for “bare metal” recovery planning, we explained why supervisors want banks to be able to restore critical services even if core systems are compromised. We noted that AI is raising the scale and complexity of cyber attacks, prompting regulators to press for stronger end-to-end resilience and recovery capabilities across the financial system.

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