The European Central Bank (ECB) recently published its supervisory priorities for 2025 to 2027, giving financial entities a glimpse into its medium-term strategy for banking supervision. Member of the ECB’s supervisory board Patrick Montagner shares more on what market participants can expect in an interview with Eric Cloutier, group head of banking regulations at consultancy firm Forvis Mazars.
Particularly of interest to the post-trade sector are the points made about the Digital Operational Resilience Act (DORA), digitalisation, and the scenario analysis of counterparty credit risk.
New assessment
On assessing compliance with DORA, Montagner reveals that the ECB will introduce threat-led penetration testing. This is a supervisory tool that is “not entirely new in all countries” – having been previously used “informally without clear legislative rules” – but is new to the ECB as a formal means of assessment. At the outset, the test may not apply to all banks and will only focus on main risk areas and key actors.
A digital future
There’s no question about it; “Banks will ultimately need to embrace digital solutions,” says Montagner. Although the EU banking sector “operates according to one single rulebook”, it continues to experience the challenges of fragmentation. Factors such as language barriers bring “additional costs for global players”. To enhance efficiency despite these issues, the ECB believes that IT and digital investments are “vital for the sector’s future”.
Traditional banks might find themselves caught between a rock and a hard place – investing in digitalisation, which will be crucial in enabling them to compete with new entrants who are unencumbered by legacy systems and addressing competition in already profitable areas.
Risk business
Together with the European Banking Authority (EBA), the ECB will be conducting a 2025 EU-wide stress test that will continue until the end of 2027. Running parallel to this will be a scenario analysis of counterparty credit risk described by Montagner as “a deep dive into banks’ counterparty credit risk exposures to non-bank financial intermediaries”. This test aims to “follow up on some deficiencies in stress test practices identified by the ECB in targeted counterparty credit risk reviews”.
Montagner reminds financial entities, “As a supervisory authority, our primary focus is risks. Risks are dynamic and ever-changing, and since a bank’s business model inherently involves taking risks, it’s imperative for them to assess and reassess these risks daily.”