Frank Elderson: Supervisory Risk Appetite, Efficiency And Effectiveness

Frank Elderson, Vice-Chair of the European Central Bank’s Supervisory Board and a member of its Executive Board, said European banking supervision is prioritising material risks and simplifying processes to stay effective as banks face a more uncertain environment. Speaking at an international conference of banking supervisors in Bali on September 30, he described the approach as three pillars: sharper risk prioritisation, simpler and more efficient supervision, and timely remediation.

Elderson said today’s supervisory challenge is not simply a larger number of risks, but risks that are increasingly uncertain, interconnected and volatile. He cited geopolitical fragmentation, technological change, energy and commodity price volatility, inflation, demographic shifts, links between banks and non-bank financial institutions, and climate- and nature-related risks. He argued that supervisors should respond with clearer forward-looking priorities, rather than attempting to examine every risk at every bank in equal detail each year.

He said the ECB has increased its supervisory risk tolerance through a dedicated risk tolerance framework. The framework helps determine how much residual supervisory risk may be accepted when some areas receive less intensive review or are deferred. Elderson described such de-prioritisation as a conscious supervisory judgment within an institutional framework, rather than simply an omission caused by limited resources. Lower-priority areas at individual banks may consequently receive less intensive scrutiny in a given year.

On efficiency, Elderson cited the ECB’s Next Level Supervision initiative, which reviews processes to reduce duplication, speed up work and limit information requests to what is necessary. He said the ECB had reviewed more than 100 guidance publications: around 40 were discontinued, while others were revised or remain under review. For standardised, lower-risk securitisations, he said average processing time fell from three months to about seven days. He also cited a roughly 55% reduction in stress-testing data points and shorter fit-and-proper assessment turnaround times through digitalisation and AI-enabled processes.

How Risk Priorities Shape Bank Oversight

The approach could change where supervisors direct their attention and how often they examine particular issues. Elderson’s argument is that concentrating effort on material risks and underlying weaknesses can make oversight more useful in a complex environment. He pointed to governance, risk culture and business models as areas where problems may build even when a bank meets formal capital and liquidity requirements.

For banks, fewer repeated information requests and simpler processes may reduce supervisory workload. But Elderson said simplification is intended to preserve the same level of safety and soundness, not weaken safeguards. The practical balance matters: a framework that relies more on supervisory judgment places weight on supervisors identifying serious problems and acting when risks are not adequately managed.

The change also involves responsibilities beyond the ECB. Elderson said banks and other stakeholders need to apply rules with attention to materiality, and he argued that repeated requests for guidance in pursuit of greater legal certainty can impede a more agile environment. These are his assessments of the cultural shift required; the speech did not establish how individual banks will respond.

From Minimum Rules to Material Risks

Elderson linked the case for broader risk assessment to the 2023 banking turmoil. He said that episode showed how a bank can meet formal capital and liquidity requirements while weaknesses in governance, risk culture or its business model accumulate. His point was that compliance with minimum requirements alone does not address every source of vulnerability.

The ECB’s stated model combines prioritisation with operational changes. Risk-based supervision identifies where attention should go; the risk tolerance framework makes explicit that some areas will receive less scrutiny or be deferred. Process reviews, guidance revisions and shorter approval times form the efficiency pillar. Elderson identified timely remediation as the third pillar, though the available speech text provides fewer details about its implementation than about risk prioritisation and simplification.

Elderson also referred to a recent European Commission report on banking competitiveness, saying it highlighted the shared responsibility for creating a less risk-averse and more agile environment. His speech presented that as a related policy context, while focusing on how the ECB is adapting its own supervisory approach.

„In a more complex world, effective supervision requires clearer, forward-looking prioritisation.“

— Frank Elderson, ECB Supervisory Board Vice-Chair

What the ECB Has Yet to Show

Elderson said the approach’s impact is beginning to emerge, but that the full effects will take time. The speech did not provide a timeline for evaluating the framework or measures showing whether prioritisation has improved the detection or remediation of risks.

It is also not clear from the speech how the ECB will measure the residual risk accepted when particular areas are reviewed less intensively, or how often deferred topics will return to supervisory attention. Elderson described the framework and its intent, but gave no bank-specific examples of areas that had been deprioritised.

The remarks cited shorter processing times and reduced data requirements, but did not specify the periods used for comparison or report a complete assessment of costs and outcomes. The longer passage on timely remediation was not available in the provided source text, so details of that pillar cannot be established here.

Measuring the Supervisory Changes

The ECB’s work will continue through its review of supervisory processes and guidance, including publications still undergoing more detailed examination. Elderson said the cultural shift and the full impact of the new approach will take time, but did not announce a specific deadline or next milestone at the conference.

Further evidence will be needed to show how the ECB applies its risk tolerance framework in practice, how it monitors deferred or lower-priority issues, and whether shorter processes leave supervisors with more capacity for material risks. Elderson also framed implementation as a shared responsibility, so banks’ response to the call for greater attention to materiality will be part of the development.

Key Questions

What did Frank Elderson announce?

He outlined how European banking supervision is adapting through sharper risk prioritisation, simpler processes and timely remediation. The speech described an approach, rather than announcing a new regulation.

What is the ECB’s risk tolerance framework?

Elderson said the framework clarifies how much residual supervisory risk may be accepted when some topics receive less intensive review or are deferred. He described these choices as conscious judgments within an institutional framework.

Will the changes reduce bank safeguards?

Elderson said simplification is intended to reduce undue complexity and free supervisory capacity without lowering guardrails or weakening resilience. The speech did not provide a later evaluation of results.

What changes has the ECB reported so far?

Elderson said the ECB discontinued around 40 of more than 100 reviewed guidance publications, cut average processing for standardised, lower-risk securitisations from three months to about seven days, and reduced stress-testing data points by roughly 55%.

Source: primary