ECB proposes lighter supervision for smaller European banks

The European Central Bank (ECB) is proposing a major expansion of proportionality in banking supervision that could bring around 150 additional smaller banks under a lighter regulatory framework, according to ECB Executive Board member Frank Elderson. In a post on the ECB’s supervision blog, Elderson, who is also vice-chair of the ECB’s Supervisory Board, outlined proposals to reduce the regulatory and supervisory burden on small and non-complex institutions (SNCIs) without lowering the safeguards that underpin banking stability. Rather than creating a separate regulatory regime for smaller banks, the proposals would build on the existing SNCI framework by widening the number of institutions that qualify and reducing the frequency and intensity of some supervisory activities. Elderson said Europe’s diverse banking landscape was one of its strengths, with smaller and locally focused banks playing an important role in financing households and small and medium-sized enterprises. “These institutions play an important role in financing households and small and medium-sized enterprises, helping innovative ideas become successful products and supporting jobs and investment across the region,” Elderson wrote. He argued that a banking sector combining different business models, sizes and areas of expertise was better equipped to meet the financing needs of the European economy, which he linked directly to competitiveness. The ECB’s approach is based on the principle that regulatory requirements should reflect a bank’s size, complexity and risk profile. Elderson stressed, however, that smaller banks were not free from the risks facing the wider financial sector, pointing to geopolitical risks, cyber resilience in the age of frontier artificial intelligence models, digitalisation and climate and nature-related risks. “Depositors in smaller banks should be just as confident that their savings are safe and their bank is well managed, resilient and subject to robust risk management standards as those in larger institutions,” he wrote. The ECB believes that a more focused framework could allow smaller banks to concentrate their resources on their most significant risks while reducing compliance work that does not materially improve their resilience. Wider definition of smaller banks The most significant proposed change would be to broaden the definition of what qualifies as a small bank. The current SNCI framework covers 75 per cent of all less significant institutions under European banking supervision, representing more than 1,400 entities as of December 2025. Under the proposals, national authorities would be able to raise the current €5 billion total assets threshold for an SNCI to as much as €10 billion, depending on the size and structure of their domestic banking sectors. The ECB is also proposing changes to better reflect what constitutes a non-complex bank in practice. Elderson said some banks, particularly in smaller member states, currently fail to qualify as SNCIs because of technical aspects of their recovery and resolution arrangements even though they are not complex from a resolution perspective. Taken together, the proposed changes could result in up to 85 per cent of less significant institutions falling within the SNCI category, bringing around 150 additional banks under the framework. The ECB also wants the SNCI category to be used more consistently in future European banking legislation, with new and amended rules setting out specifically how they apply to smaller and non-complex institutions. Less frequent supervisory reviews The changes would not be limited to the legal definition of a smaller bank, with the ECB also proposing changes to how supervision is carried out. The Supervisory Review and Evaluation Process (SREP), which is a central part of banking supervision, could be carried out less frequently for some institutions. Elderson said some banks could potentially go two to three years without a full SREP, where their risk profile justified such an approach. This would remain subject to supervisory discretion, meaning that banks could still be assessed more frequently where their risks warranted closer scrutiny. “Where risks are low, some supervisory assessments will in practice be carried out even less frequently, reducing the burden on banks without undermining supervisory effectiveness,” Elderson wrote. The ECB is also proposing to reduce the burden of stress testing. Regular bottom-up stress tests, in which banks conduct their own projections and submit them to supervisors, would be carried out only selectively for SNCIs. Instead, supervisors would make greater use of top-down exercises in which projections are conducted centrally. The approach could significantly reduce the workload for almost 1,000 SNCIs that are currently still subject to bottom-up stress tests. Reporting requirements could fall sharply Reporting is another area where the ECB is proposing substantial reductions. The central bank said its systems have already been adapted to allow a materiality threshold for reporting resubmissions to be introduced once the relevant legislative changes have been completed. A new SNCI category is also due to be introduced into the ECB’s FINREP regulation from 2027, beginning with a public consultation. Under the proposed changes, the volume of financial reporting required from SNCIs could fall from around 13,500 data points to approximately 700. The planned revisions to the European Banking Authority’s technical standards on supervisory reporting are also expected to remove numerous reporting templates, eliminate overlaps and exempt SNCIs from certain templates. More flexibility on governance The ECB is also proposing a more proportionate approach to corporate governance requirements. Supervisors would make greater use of existing flexibility to take account of a bank’s risk profile and complexity. This could allow certain committees to be combined, including nomination and remuneration committees, while functions such as risk management and compliance could also be combined where appropriate. The proposals would provide greater flexibility around remuneration requirements, including possible exemptions from requirements to defer variable remuneration or pay it in financial instruments. The periodic independent review of remuneration policies could also be outsourced and applied proportionately according to the sophistication of an institution’s internal stress testing. Cyprus among smaller banking markets The proposals could be particularly relevant to smaller European banking markets, although the ECB has not indicated which individual national authorities would raise the €5 billion threshold. Cyprus has a relatively small banking market and its domestic institutions are supervised within the European banking supervision framework, meaning any decision on applying the higher SNCI threshold would ultimately depend on the relevant rules and supervisory assessment. Elderson stressed that the proposed changes should not be interpreted as a relaxation of fundamental banking safeguards. “Proportionality should not be mistaken for reducing prudential standards for smaller banks,” he wrote. “The aim is not to lower standards, but to achieve them in a more efficient and proportionate manner,” he added. The ECB also says that any simpler regime for smaller banks must be accompanied by a credible, flexible and efficient crisis management framework. Elderson argued that reducing unnecessary administrative work could instead allow smaller banks to devote scarce resources to risk management, serving customers, investing in competitiveness and improving efficiency. “By reducing undue complexity and the administrative burden for small and non-complex banks, these measures can support the competitiveness of Europe’s diverse banking sector, without compromising resilience,” he wrote. The ECB is now preparing to implement the proposed simplification measures that fall within its own remit. It will also work with European institutional partners on measures requiring action beyond the ECB, including initiatives being developed through the European Banking Authority. Elderson said the changes formed part of a broader effort to simplify European banking supervision beyond the measures specifically targeting smaller banks. “Our goal is clear: to make our supervision more efficient, more effective and more risk-based, while continuing to preserve banks’ resilience,” he wrote.