Deregulation, Desupervision and Simplification: What Next for the ECB?

21^st January 2026

Key Takeaways

A powerful wave of deregulation, and even “desupervision,” is sweeping through international banking policy and supervisory practice.  The Bank of England has recently published a proposed relaxation of UK bank capital requirements, while the Federal Reserve (and other US authorities) have embraced an extensive package of supervisory reforms – and job cuts.

The ECB has now set out its own stall, with a set of proposals on banking capital simplification, and a commendable menu of improvements to supervisory practices, building on its recent reforms of the Supervisory Reform and Evaluation Process (SREP).  These merit applause from both bankers and supervisors.

The ECB should, however, go further.  It could improve the transparency of its supervisory processes in several respects, including by tackling some of the “black boxes” in its own approach.  In doing so, it would provide better clarity to banks as to how to earn an improved supervisory assessment which is then reflected in individual capital requirements.   That is neither an exercise in deregulation nor desupervision.  It is also immediately within the ECB’s ability to implement as part of its welcome reform agenda.

Introduction

The international debate on banking deregulation is accelerating, with important developments in recent weeks in London, Washington DC and Frankfurt.  These help frame the choices the ECB faces about reforming banking supervision, as the ECB’s Single Supervisory Mechanism has now set out a commendable programme of improvements, building on its existing changes to the SREP supervisory assessment process.  But do these go far enough?

UK Developments

Let’s start with deregulation, specifically of bank capital standards, and a recent announcement by the Bank of England.    Banking capital standards, strengthened across various fronts after the financial crisis, have recently come under sustained criticism by some in the banking industry and the Trump administration as having gone too far, hurting growth and driving lending into shadow banks, like the burgeoning private credit sector.  The Basel capital framework has survived so far, but is fragile, with changes to market and operational risk capital stalled, and UK and European regulators waiting nervously to see how the Federal Reserve will amend, and almost certainly dilute, the Basel III “endgame” package of credit risk capital reforms.  These changes notoriously provoked so much ire in the US banking industry that they were attacked in advertisements on the New York subway and during the Superbowl.

Against this backdrop, the Bank of England, whose Prudential Regulation Authority (PRA) operates under a new secondary objective to promote UK competitiveness and an exhortation by the Chancellor of the Exchequer to deregulate, published an important announcement on bank capital on 2 December.¹  The Bank of England concluded that the benchmark level of capital in the UK banking system should be lowered from 14% to 13%.  And it signals more reforms to come:  on the size of leveraged capital buffers, on the threshold when higher capital standards kick in for domestic banks and on making it easier for banks to win approval for internal rating-based models for their mortgage portfolios.  The Bank’s thoughtful analysis also includes a fascinating comparative analysis of UK, European and US capital requirements, of which more later.

US Developments

Next, to Washington, DC, where the deregulation agenda has morphed into what might be described, fairly in one respect at least, as “desupervision.”  In a series of announcements², the Federal Reserve (mirroring similar changes at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) has said that its supervision staff will be reduced by 30% and that its supervisory assessment process will be amended in several important ways.  US banks will have more leeway to retain an overall “well-managed” supervisory assessment despite an individual “deficient” score, and will no longer face a presumption of enforcement from weak scores.  Supervisors should now only raise findings for material problems and not for procedural or documentation shortcomings and must engage with banks in dialogue as to whether findings are “justified” or “lack clarity.”  Less weight should also now be placed on “management” scores, and “reputational” risk is not to be considered at all, criticised by the Trump administration as resulting in “debanking” of customers.  Horizontal supervisory assessments will also be changed.  

Elements of these changes are worrying, and justify the “desupervision” headline, especially as the reduction in supervisory staff appears to be causing experienced, senior officials to leave the Fed, OCC and FDIC.  Bankers in the US or elsewhere should be concerned about this:  seasoned supervisors will be a better counterpart for dialogue with a bank’s senior management, understanding the balance between risk and commercial goals, and having the experience to help banks navigate the nuances of prudential standards.  Well-managed banks may well suffer from poorer interactions, and poorly managed banks from weaker oversight.  And the emphasis on more open dialogue as to whether supervisory actions are “justified” is welcome but can go too far, as evidenced with the UK FSA’s brief, pre crisis emphasis on “relationship management” with supervised firms, having a subtle and corrosive impact on supervisory standards if taken too far.

That said, there are also sensible elements of the Fed’s proposals which the ECB should look at more closely.  Horizontal assessments will now be less frequent, requiring more senior approval and only agreed where the cost-benefit case is compelling.  Any conclusions of these should be based on supervisory expectations and not peer best practice.  And seeing ECB findings from on-site inspections (OSIs) shorn of an excessive focus on procedural or documentation shortcomings, as the Fed now intends, would be welcome.

Taken collectively this is a potent set of reforms to US banking supervision and comes on the heels of an earlier decision to publish more details of the Fed’s “black box” stress test design that is, as we shall see in the Bank of England analysis, so crucial to setting binding capital requirements for US banks.

The ECB Response

Compared to these developments, the recommendations of the ECB’s High-Level Task Force (HLTF) on Simplification that were published on 11 December³ will no doubt have disappointed many European bankers.  But this misunderstands the remit of the group, with European policy makers (so far) holding the line against deregulation but instead embracing a programme of “simplification.”    The HLTF proposes simplifying the operation of the multiple regulatory capital “stacks,” changing the design of AT1 capital instruments, and ensuring a more joined-up approach between micro and macroprudential capital requirements, amongst other recommendations.  These various proposals merit further discussion, in another contribution to this forum perhaps, but my focus here is on reform of ECB supervisory practices.  In any case, the real debate on whether the European initiative on simplification will incorporate deregulatory elements, including relaxation of capital requirements, will burst into the open later this year, when the European Commission publishes an eagerly awaited report on European banking competitiveness and EU member states weight in with their views.

While the financial press coverage focused on the HLTF report, it was almost unnoticed that the ECB also published a report on “Streamlining Supervision” and it is here that the Single Supervisory Mechanism has the capacity to initiate reforms immediately, under its own powers.  These initiatives merit applause from both bankers and supervisors, but do they go far enough?

It should be acknowledged at the outset that the SSM approaches this exercise from a position of strength in at least two respects.  First, and most importantly, that SSM has largely been a success, as measured by the stronger health of the European banks within its remit⁴, the sustained reduction in non-performing loans in the sector⁵ and by avoiding the problems that hit Silicon Valley Bank (including its UK subsidiary), US regional banks and Credit Suisse in the spring of 2023.  

There have, however, been some missteps, such as its recent work on highly leveraged transactions, where a sensible initiative stumbled due to misalignment with parallel US definitions⁶ and, especially, through the heavy-handed⁷ use of an untransparent and poorly calibrated “challenger model.”  This highlights an area for reform, as explained below.

Secondly, the ECB deserves praise for initiating reforms of its supervisory processes well before the winds of deregulation and desupervision started blowing from the United States.  The SSM appointed an Expert Group (of which I was a member for a period) to recommend⁸ reforms of its Supervisory Review and Evaluation Process (SREP) and these have been taken forward vigorously by the ECB.  The SSM also introduced a new second line of defence function within the ECB to improve internal quality control and challenge.

These reforms to the SREP process are already delivering welcome benefits to supervisors and banks.  The SREP letters to banks are hugely improved, with a more concise explanation of SREP scores, clarity about a better prioritised, shorter list of supervisory concerns and much less tedious legalese and excessive detail.  They will have been harder for the supervisory teams to produce⁹ but now can be better understood by management and Boards of Directors and so have more impact.   Management and boards are also receiving clearer data on new and outstanding Qualitative Measures (ie, supervisor-mandated actions), with the promise of fewer of these in the future, and the end-to-end process is much faster.

Now, the SSM promises to go further in its 11 December report, with six “Next-Level Supervision” initiatives.  These are:

•    Faster, streamlined decision-making, including a fast-track process for significant risk transfer securitisation (SRTs)
•    Faster and more focussed internal model approvals
•    Streamlined and less complex stress testing exercises
•    Fast-track approval of more low-risk own funds transactions (like share buybacks)
•    A drive (with the EBA) to streamline supervisory reporting
•    More targeted on-site investigations, “fostering proportionality and quality”

And behind the scenes, the SSM is driving through changes to supervisory culture, emphasising a more risk-based, outcome-focussed approach, and is developing metrics to better measure the effectiveness of its reforms.  It also looks as if the existing stock of ECB guidance will be reviewed.

The ECB Should Go Further

The devil will be in the detail, but on the face of it, these reforms are very welcome and should, if implemented vigorously, make SSM supervision less burdensome for banks (and the ECB’s own supervisory teams) without weakening standards.  

There is, however, room for the SSM to go further, specifically in the transparency of its supervisory processes.   The ECB could tackle some of its own “black boxes” in the SSM’s approach to supervision, like the Fed has done.  I see scope for this in four respects:

Transparency (and commitment) about what improves Supervisory Review and Examination Process (SREP) scores – The new SREP letters are a step change improvement in clarity about the SSM’s areas of concern and the reasoning behind individual SREP scores.  But bankers tell me that they are frustrated by a lack of clarity – and, crucially, commitment – from supervisory teams about what would result in an improved SREP score.   Front line supervisors should be blunt about where scores are unlikely to improve in any circumstances and of course must caveat themselves that new problems mean a bank will get a worse score.  But, otherwise, there could be more transparency and commitment about the route to an improved SREP score.  Perhaps the SSM Board needs to give its front-line supervisors more discretion within its internal processes to make this happen.

Transparency about the relationship between SREP scores and Pillar 2 capital requirements (P2R) – The SSM is working on a proposal to simplify the mechanics of using the SREP scores (and banks’ own ICAAP calculations) to determine Pillar 2R capital add-ons.  This is an area ripe for more clarity and transparency, which (combined with the proposal immediately above) should create a positive incentive to banks to address matters in the SREP to earn a proportionate reduction in P2R buffers.

Transparency (and quality control) about challenger models – Like the Federal Reserve, the SSM operates certain “black box” challenger models in several areas, including the Asset Quality Review process (to vet credit portfolio provision levels upon entry to SSM supervision), the Pillar 2 Guidance (P2G) stress test quality control process (to insist upon higher loss outcomes at a portfolio level) and in on-site investigations (typically, as was the case for highly leveraged transactions, to press for increased provisions, sometime very significantly so). Information on these models is very limited and (I believe) they are not subject, prior to use, to the same independent validation process that the SSM requires of banks.  This is an area where improved quality control and the Fed’s greater transparency about its stress testing models would be a useful template for further SSM reforms.

Transparency about peer comparisons – The ECB publishes useful, but very wide, peer data on SREP scores.  However, it is, I think, missing the capacity to be more impactful – and genuinely helpful to banks and their Boards.  When I presented supervisory scores to British banks during my time at the UK Financial Services Authority, the Boards of Directors were at their most attentive when we showed their scores relative to their closest few peers.  And insisting that a Board receives sharply presented, comparative peer risk data can be hugely impactful.  This peer analysis is a supervisory “superpower” that could be better employed by the SSM.  Showing bank boards the extent of their institutions’ leveraged transaction exposure (eg, as a percentage of CET1) versus its peers would have been highly impactful, for example.

The SSM may worry that this sort of transparency, especially around the SREP-to-P2R mechanism or the calibration of challenger models, might lead to gaming by banks.  That is not unreasonable as a concern, but the balance of the argument tilts towards being more open, not just because of the current deregulation debate, but because it better aligns with the ECB’s own guidance to banks about risk culture, and the benefits of challenge and openness.  

The Nexus Between Supervisory Reforms and Capital Requirements

Reforms of the supervisory process also provide a route to proportionate and well-earned adjustments to capital requirements at an individual firm level.  Pillar 1 risk-weighted assets (RWAs) are influenced, of course, by supervisory reviews of (and conditions imposed on) banks’ internal ratings-based (IRB) models.  And as noted above, P2R capital buffers are influenced by supervisory SREP scores.  Plus, P2G – or in UK terminology, the P2B and in the US, the Stress Capital Buffer – are heavily influenced by supervisory processes.  

The capital stakes are illustrated by the comparative analysis of CET1 ratios from the Bank of England report published on 2 December, which I mentioned at the outset of this note.  Here below is the outcome for “large banks” from the Bank of England.  

                                   Comparison of CET1 ratios of large banks in the UK, Euro area and the US
                                    Source:  Chart 5, Bank of England, Financial Stability in Focus

The results of the analysis are at odds with recent advocacy papers¹⁰ by European banking associations, which argue that EU banks are at a competitive disadvantage to US banks.¹¹  It will be interesting to see what the European Commission concludes on this point when it publishes its report on European banks’ international competitiveness.  

But what catches my eye from this analysis, is the out-sized contribution to large US banks’ capital requirements from the stress capital buffer.  This underlines the interaction between supervisory processes and capital requirements -- and holds out the prospect of a significant capital release for US banks from the Federal Reserve’s recent reforms, regardless of what happens on the future implementation of the Basel standards.

Conclusion

This illustrates the high stakes in the ECB’s initiatives, past and present, to reform its supervisory approach.  These should be warmly welcomed by bankers and supervisors alike, but the SSM has scope to go further.  It could improve the transparency of key elements of its processes and in doing so provide better clarity to banks as to how to earn an improved supervisory assessment which is then reflected in individual capital requirements.  That is neither an exercise in deregulation nor desupervision.   It is also immediately within the ECB’s ability to implement as part of the Next-Level Supervision agenda. 
 

Notes

¹ Bank of England, Financial Stability in Focus, 2 December.
² Revisions to Large Financial Institution Rating System, 4 November; Statement of Supervisory Operating Principles, 10 November; testimony by Michelle Bowman to the House Committee on Financial Services, 2 December.
³ European Central Bank, Report of the High-Level Task Force on Simplification, 11 December.
⁴ For a recent recap of the progress in strengthening capital see, for example, Claudia Buch, The Evidence Is In:  Resilient Banks Build Europe’s Growth on Solid Ground, 19 November 2025, speech at the EBA Policy Research Workshop on “Bridging Capital and Growth.” 
⁵ For the most recent data see:  Non-Performing Loans Ratio, Significant Institutions, SSM Countries, Quarterly, ECB Data Portal, 17 December 2025.
⁶ The ECB used a wider definition of highly leveraged transactions than the pre-Trump Federal Reserve.  The Trump era Fed has in fact just recently narrowed its definition further in sympathy to banks’ concerns that this was driving lending to Non-Bank Financial Institutions, especially “shadow banking” private credit firms.
⁷ As reported at various times over the past two years by Laura Noonan and her colleagues at Bloomberg.  See, for example:  Laura Noonan, Nicholas Comfort and Sonia Sirletti, How the ECB’s Ambitious Plan to Curb Risky Lending Veered Off Course, Bloomberg, 13 September 2024 and Laura Noonan and Nicholas Comfort, ECB Curbs Black Box Models to End Standoff Over Risky Loans, Bloomberg, 8 September 2025.
⁸ Report by the Expert Group to the Chair of the Supervisory Board of the ECB, Assessment of the European Central Bank’s Supervisory Review and Evaluation Process, 17 April 2023.   (Note that I left the group before its recommendations were finalised.)
⁹ One can recall the wonderful line from Mark Twain as he concluded a lengthy correspondence: ‘I’m sorry this letter was so long; it would have been shorter if I had more time to write it.”
¹⁰ See, for example:  Oliver Wyman and the European Banking Federation, The EU Banking Regulatory Framework and Its Impact on Banks and the Economy, January 2023.
¹¹ This is because the Bank adjusts for the fact that US RWAs tend to incorporate P2R elements directly; this explains why P2R is not shown separately for Eurozone banks in this chart.  Please see the Bank’s paper for the detailed explanation of their methodology and the interesting comparison with the unadjusted data in Chart A3.A in Annex 3 of the paper.