Frank Elderson, Member of the Executive Board of the European Central Bank (ECB) and Vice-Chair of the Supervisory Board of the ECB, spoke with Aloysius Widmann on 14 October 2026 regarding the ongoing debate over regulatory costs, international competitiveness, the dangers of market fragmentation, and the emerging systemic risks posed by artificial intelligence and non-bank financial interconnectedness.
Balancing Regulatory Costs Against Systemic Stability
Financial institutions across Europe almost universally complain about the heavy financial and operational burden imposed by modern banking regulation. The core debate centers on whether these expenses are excessive or whether they form an indispensable bulwark for the stability of the entire financial architecture.
Reflecting on the lessons learned from the global financial turmoil of 2008, the costs of that crisis were staggering, extending far beyond balance sheets to devastate households, corporations, taxpayers, and society at large. Those historic losses vastly outweigh the ongoing costs of modern regulatory compliance. Thanks to the comprehensive regulatory reforms introduced in the aftermath of that crisis, European credit institutions are fundamentally more resilient today. Modern banks generally boast robust capital reserves, high liquidity buffers, and levels of profitability that surpass those seen for many years.
Despite these clear gains in systemic resilience, the question of whether supervision can be streamlined without compromising stability remains a central focus. Over time, the regulatory and supervisory architecture has undoubtedly grown more complex. This evolution is driven largely by the fact that banks themselves vary enormously in size and business models while operating within an increasingly intricate global environment. Furthermore, the risk landscape has expanded dramatically to encompass severe geopolitical tensions, rising cyber threats, climate and nature-related vulnerabilities, and the disruptive emergence of artificial intelligence.
Complexity, however, is never pursued as an end in itself. European supervisors continually evaluate whether regulatory objectives can be achieved through simpler rules and streamlined processes. A wide range of measures has already been implemented to reduce reporting obligations and accelerate administrative procedures. Nevertheless, true simplification must never be confused with deregulation. Systemic resilience remains the indispensable foundation for sustainable long-term economic growth and international competitiveness.
Overcoming European Market Fragmentation
Regulation inherently generates costs, which critics frequently argue create a competitive disadvantage for European institutions on the global stage. When evaluating the primary obstacles hindering the international competitiveness of European banks, the most critical diagnosis points directly to structural fragmentation.
Despite decades of economic integration, Europe still lacks a truly single, unified banking market. Cross-border banking activities remain severely restricted, preventing institutions from fully capturing economies of scale, achieving optimal asset diversification, and ensuring the most efficient allocation of capital and liquidity across the broader European economy. This enduring fragmentation drives up operational costs, depresses efficiency, and limits the capacity of European banks to achieve the scale necessary to compete effectively on a global level. This structural hurdle extends far beyond the financial sector, affecting numerous other industries as well. While the concept of a Single Market is widely discussed, the reality on the ground remains far from unified.
If fragmentation is the fundamental diagnosis, deeper integration is the necessary remedy—not deregulation. Policymakers must complete the Single Market, finalize the savings and investments union, and fully establish the banking union, including the long-delayed implementation of a European deposit insurance scheme.
Simplification and integration represent two inseparable sides of the same coin: the overarching European competitiveness agenda. Achieving sustainable economic success requires pursuing both objectives simultaneously. This explains why it is vital that the upcoming banking reform package proposed by the European Commission successfully keeps both dimensions aligned.
The Vision for a Fully Integrated Banking Market
A fully integrated banking market could profoundly transform cross-border lending, though predicting the exact pace of change is difficult. Operating within a single legal jurisdiction encompassing hundreds of millions of customers would naturally foster intensified competition, drive the development of superior financial products, and enhance risk-sharing mechanisms. Furthermore, integrated institutions would be better positioned to finance critical, future-oriented investments required to navigate monumental challenges such as the climate and nature crises, the ongoing energy transition, and shifting demographic trends.
At present, lingering discrepancies across national legal frameworks, insolvency regimes, and consumer protection rules make cross-border banking unnecessarily complex and expensive. These barriers are entirely self-inflicted by European policymakers rather than imposed by external forces. Because they were built from within, they can—and must—be dismantled urgently. Given the sheer scale of the investment challenges looming ahead, there is no time to lose.
Global Standards and the Risks of Loosening Basel III
Some international jurisdictions have considered relieving the regulatory burden on their domestic banking sectors by implementing the Basel III standards more loosely. This raises concerns that Europe might compromise its own standards, potentially harming the long-term competitiveness of its financial institutions.
Banking is inherently a global industry where capital flows freely across borders, institutions are deeply interconnected, and financial risks rarely respect national boundaries. This global interconnectedness underscores the vital importance of maintaining consistent international standards. The goal is for banks to compete based on operational efficiency, innovation, and risk management capabilities rather than operating under the jurisdictions with the weakest rules.
The Basel standards have successfully established a common minimum benchmark for global banking regulation and prudential supervision, ensuring a level playing field. While legitimate space exists for tailored national variations when they are fully justified, evidence-based, and carefully targeted, policymakers share a fundamental responsibility to uphold robust minimum standards in a globalized financial system where shocks propagate rapidly. Simply lowering regulatory requirements does not make underlying risks disappear; supervisors would still be forced to assess those exposures and ensure banks manage them appropriately. Consequently, loosening Pillar 1 requirements would merely shift the regulatory burden downstream into supervisory oversight.
Proportionality in Supervision
Calls for supervisory frameworks to become more proportionate—meaning they should be tailored more closely to the specific size, complexity, and risk profile of individual institutions—are gaining traction. Proportionality, however, is not a euphemism for weakening supervisory rigor. The objective is to apply rules more intelligently, utilizing criteria such as asset size, complexity, and inherent risk profile.
This principle is already deeply embedded in the existing legal framework. For example, the regulatory category designated for small and non-complex banks is already subject to significantly lighter reporting requirements, with these institutions reporting only a fraction of the data demanded of large, globally systemic banks.
Nevertheless, significant room remains to expand the application of proportionality. Raising the current asset threshold for defining a small and non-complex bank—historically set at five billion euros in total assets—up to ten billion euros would allow approximately 150 additional banks to benefit from a simplified regulatory regime. Additional avenues for relief include extending the intervals between regular supervisory reviews where underlying risk profiles justify it, and making greater use of supervisory data that authorities already possess during periodic stress tests. Such measures would meaningfully reduce administrative workloads for smaller and less complex financial institutions.
Any move toward simplification, however, must stop strictly where risk begins. Proportionality can only extend as far as a bank’s individual risk profile permits, and only to the extent that it does not impair the fundamental mandate to safeguard financial stability and ensure institutions remain safe and sound. Core prudential standards must remain untouched. Banks must continue to maintain sound corporate governance, effective risk management systems, adequate capital and liquidity cushions, and robust resilience against emerging threats. Smarter, more proportionate supervision not only alleviates unnecessary burdens on smaller banks but also frees up valuable supervisory resources, allowing authorities to concentrate intensively on the most significant systemic risks.
Artificial Intelligence and Emerging Cyber Threats
The rapid advancement of artificial intelligence presents profound opportunities for the banking sector. AI holds enormous potential to enhance risk management practices, streamline information processing workflows, reinforce fraud detection mechanisms, and drive overall operational efficiency. However, every transformative technology simultaneously introduces new vulnerabilities.
One of the most pressing areas of concern involves cyber risk. Advanced AI models possess the capability to discover and exploit IT vulnerabilities far more quickly than traditional methods. To address this mounting threat, European supervisors instructed banks in July to thoroughly reassess their cybersecurity measures, review IT budgets, and evaluate staffing levels. Institutions are expected to submit concrete action plans detailing how they intend to mitigate AI-related cyber risks by the end of October.
At the same time, banks must guard against becoming overly dependent on proprietary AI models. While the technology offers clear advantages—such as improving credit assessment accuracy—institutions must remain vigilant against algorithmic biases and blind spots, avoiding the mistake of delegating critical decisions entirely to automated systems. Furthermore, data quality remains a critical constraint, as AI tools are only as reliable as the underlying data used to train them. Operational dependencies also pose a growing challenge; as banks increasingly rely on a limited number of major cloud service providers, significant concentration risks emerge across the financial sector.
Interconnectedness Between Banks and Non-Bank Financial Intermediaries
The recent investment boom surrounding artificial intelligence in the United States has increasingly relied on private credit—loans extended outside the traditional banking sector—alongside corporate debt markets. Whether AI-related firms can ultimately generate the projected profits required to justify these massive investments remains an open question, raising concerns about potential spillovers into European financial markets.
The central issue in this dynamic is the intricate interconnectedness binding traditional banks and non-bank financial intermediaries. Supervisors are treating this vulnerability with the utmost seriousness, insisting that banks maintain a clear, comprehensive awareness of these hidden risks.
A diverse financial system is generally a positive attribute for the economy. Europe requires massive investments to meet its strategic priorities, and market-based finance can play a crucial supporting role alongside traditional banking channels, as certain non-bank entities are better positioned to absorb specific types of risk. However, when lending activity migrates away from the regulated banking system, the associated risks do not automatically disappear. Those exposures can easily feed back into the banking sector through hidden interconnections between banks and non-bank lenders.
For instance, a traditional bank might extend credit to a private credit provider while simultaneously financing corporate clients to whom that same provider also extends loans. This creates complex risk concentrations that may remain invisible during normal economic conditions but surface rapidly when financial stress occurs. Consequently, banks must conduct rigorous analyses of these complex linkages to ensure they can manage them effectively before vulnerabilities turn into systemic crises.
