Frank Elderson, Vice-Chair of the Supervisory Board of the European Central Bank (ECB), presented a new approach to banking supervision at an international conference organized by the Basel Committee on Banking Supervision.
In response to an increasingly complex financial environment characterized by geopolitical fragmentation, rapid technological developments, volatility in energy and commodity prices, as well as climate and nature-related risks, the ECB is adapting its supervisory framework.
According to Elderson, the challenge is not only the multiplication of risks but their uncertain, interconnected, and volatile nature. He emphasized that it is impossible for supervisors to monitor everything in detail at all times. Therefore, supervision must focus on clear, forward-looking, and targeted risk prioritization.
The ECB relies on three pillars: clearer risk prioritization, simpler and more effective supervision, and the capacity for swift intervention. Elderson stressed the importance of going beyond mere compliance with minimum capital requirements by identifying underlying weaknesses in governance, risk culture, or business models that can accumulate and potentially trigger crises.
To this end, the ECB has implemented a Risk Tolerance Framework (RTF) that defines the acceptable level of residual risk and guides supervisory trade-offs. This approach aims to make supervision more targeted and to avoid exhaustive but ineffective oversight.