By This Hour Finance Desk
European banking supervision should accept a defined amount of residual supervisory risk in lower-priority areas rather than attempt to examine every potential risk at every bank with equal intensity, Frank Elderson told an international gathering of banking supervisors in Bali on 30 September 2026.
The approach, described by the European Central Bank official as a matter of deliberate institutional choice, pairs more selective oversight with faster procedures and firmer action when a bank does not correct identified weaknesses. Its significance lies in the balance it seeks to strike: reducing administrative burden and concentrating supervisory capacity without loosening the safeguards intended to keep banks sound.
Elderson, vice-chair of the ECB Supervisory Board and a member of its Executive Board, presented the framework during a panel on navigating a changing financial landscape at a conference of the Basel Committee on Banking Supervision. He argued that supervisors confront a risk environment that has become more uncertain, connected and volatile, and that effectiveness cannot mean monitoring everything at the same depth every year.
A formal choice to leave some risks for later
The central policy point was the ECB’s supervisory risk tolerance framework. In Elderson’s account, the framework makes explicit how much residual supervisory risk the authority can accept when it conducts less intensive work in certain areas or postpones it. That differs from a situation in which an issue receives less attention merely because supervisors lack staff or time. The distinction matters because it assigns responsibility for prioritisation to the supervisory institution rather than treating it as an accidental gap.
Under that model, lower-priority risk areas at individual banks would not automatically undergo the most searching annual review. Supervisory attention would instead be directed towards risks judged material, including those affecting capital and liquidity as well as governance, operational resilience and structural exposures. Elderson also identified climate- and nature-related risks and geopolitical risks as examples of such structural drivers.
The rationale rests partly on the limits of capital and liquidity metrics. Elderson said banks can satisfy formal requirements while weaknesses in governance, risk culture or business models accumulate. The banking turmoil of 2023, he argued, illustrated why supervision must look beyond minimum ratios and focus on underlying vulnerabilities. This is a supervisory assessment and policy argument, not a claim that any particular bank currently has such deficiencies.
A more selective regime necessarily depends on judgment. A supervisor must decide which risks can bear reduced scrutiny, for how long, and what evidence would require the issue to move back up the agenda. Elderson’s position was that a simpler, less prescriptive system increases rather than diminishes the importance of supervisory judgment. Trying to encode every emerging risk and every bank-specific model in rules, he argued, can make the rulebook more complicated and open further scope for regulatory arbitrage.
He also placed obligations on banks within this proposed cultural shift. In his view, firms should take greater responsibility for applying the law in proportion to materiality rather than seeking continual additional guidance to obtain ever more legal certainty. That is an institutional expectation voiced in the speech; the material supplied does not set out how banks, investors or other authorities responded.
Process changes target duplication and approval delays
The second part of Elderson’s case concerned the ECB’s Next Level Supervision initiative. He said the project reviews supervisory processes end to end, looking for duplicated work, unnecessary information requests and avoidable delays. The stated aim is not simply to shorten procedures. It is to move supervisory resources away from complexity and towards assessments of the risks that matter most, while retaining necessary safeguards and resilience.
Several figures presented in the speech offer an indication of the scale of the programme, though they are measures reported by Elderson rather than independently assessed performance data. He said the ECB had reviewed more than 100 supervisory guidance publications. Roughly 40 had been discontinued, with others revised and some still subject to deeper review. The intended result is a body of guidance that is more concise and easier for banks and supervisors to use.
The most pronounced reported acceleration involved standardised, lower-risk securitisation approvals. Elderson said their processing time had fallen from about three months to an average of about seven days. The supplied material does not specify the measurement period, the number of approvals involved, the precise criteria for classification as standardised and less risky, or whether the shorter timetable applies across every case. Those qualifications are important when interpreting an average as evidence of the broader supervisory system’s speed.
He further said the number of data points required for stress testing had been cut by about 55%. Turnaround times for assessments of whether proposed bank managers and board members are fit and proper had been shortened through digitalisation and tools enabled by artificial intelligence. Capital-related approval timelines, he said, had fallen from several months to less than six days. The speech does not provide a separate calculation, underlying dataset or independent audit for these figures.
For banks, quicker decisions can reduce uncertainty around transactions, management appointments and capital actions. Less duplicative reporting can also release time within firms. Yet the supervisory premise is that faster processing is defensible only if it preserves sound assessment. Elderson explicitly linked simplification to maintaining guardrails, not lowering them. The material does not provide evidence by which to judge whether that outcome has been achieved over time, including whether reduced data collection affects supervisors’ ability to detect new risks.
Efficiency is paired with a demand for forceful remediation
Selective supervision and streamlined processes form only two parts of the approach Elderson described. The third is timely remediation: ensuring that a bank fixes a problem once supervisors identify it. He argued that supervision is not effective merely because it detects a weakness; it must produce lasting changes that address the root cause.
That calls for an escalation framework setting remediation paths that are proportionate, time-bound and focused on the underlying problem, according to the speech. If a bank does not respond adequately, supervisors should be prepared to use enforcement measures promptly. Elderson said delays in tackling known weaknesses can be costly, referring to lessons he drew from the banking turmoil in March 2023.
European banking supervision does not rely solely on capital requirements in this account. Elderson said its toolkit includes qualitative requirements that can concern governance, controls, processes, risk management and business-model practices. Depending on circumstances, measures can include requirements to strengthen risk management, restrictions on business activities and periodic penalty payments. The appropriate response, he said, should reflect the seriousness and persistence of a weakness and how a bank responds.
This combination resolves a potential tension in the programme only if it works in practice. A supervisor that is willing to defer lower-priority issues needs enough capacity and resolve to act decisively on higher-priority findings. Equally, a simplified process must not turn into weaker scrutiny of the cases that pose greater risk. Elderson’s framework presents prioritisation, procedural efficiency and escalation as mutually reinforcing, but the supplied material contains no outcome data on enforcement activity or bank remediation rates.
Standards and competitiveness are presented as complements
Elderson situated the supervisory agenda in a wider policy debate about growth and banking competitiveness. He rejected the premise that resilience and competitiveness are competing objectives, arguing instead that a stable banking system supports sustainable growth. In that view, competitiveness cannot be reduced to profitability alone; resilience, efficiency, innovation and the ability to adopt new technologies also matter.
He cautioned that cutting prudential standards or capital requirements would not necessarily increase competitiveness or lending. His argument was that lower requirements could reduce resilience and might instead permit larger distributions to shareholders, including share buybacks. This is the position advanced in the speech, not a forecast of banks’ future capital-management decisions.
International standards therefore remain central to the approach. Elderson said common minimum expectations help protect resilience and preserve a level playing field across jurisdictions, while allowing local implementation. He argued for timely, full implementation of Basel III and against unnecessary divergence where banks operate in multiple markets. At the same time, he said supervisors need latitude for bank-specific qualitative and quantitative measures because business models, governance, controls and risk exposures can differ materially.
No current market price, yield, exchange rate or other financial-market measure was included in the material, and no market reaction is reported here. Nor does the supplied information identify any immediate rule change, new binding requirement or implementation timetable beyond Elderson’s statement that simplification initiatives would continue through the year.
The account is based on a single ECB page describing Elderson’s contribution and on the claims derived from it. It has not been independently corroborated. The reported operational improvements, the risk-tolerance framework’s effectiveness and the consequences for supervised banks would require further documentation and observation to assess.
For further context on this subject, see IBIT Options Point to Lower Expected Volatility in Saxo Analysis.
Reporting notes
What is confirmed: The ECB speech cited guidance withdrawals, shorter approval times and a reduction in stress-test data points as early results of its simplification work.
Why this matters: The approach seeks to reduce supervisory burden without weakening bank resilience, placing greater weight on supervisory judgment and timely enforcement.
What remains unclear: The supplied material provides no independent assessment of the reported metrics, enforcement results or impact on banks’ resilience. This report is based on one source and has not been independently corroborated.
