Finance
With markets underpricing risk, Europe must not ease bank regulation, ECB argues
Published by Global Banking & Finance Review®
Posted on November 13, 2025
2 min readLast updated: January 21, 2026
Global Banking & Finance Review®
Company
Published by Global Banking & Finance Review®
Posted on November 13, 2025
2 min readLast updated: January 21, 2026
ECB argues Europe must maintain bank regulations as markets underprice risks, ensuring banks' resilience and stability.
FRANKFURT (Reuters) -Financial markets are underpricing geopolitical risks and nearly all euro zone banks are exposed to some extent, so weakening regulation now could jeopardize the sector's viability in the longer run, ECB supervisory chief Claudia Buch said on Thursday.
U.S. officials are working on a raft of initiatives to ease the regulatory burden on U.S. banks, including softening capital rules, a pullback on supervisory bank exams and a friendlier stance on bank mergers.
Buch, however, pushed back on these ideas, arguing that capital requirements do not come at the expense of profitability and banks must be prepared for difficult-to-predict scenarios, especially as governments' ability to respond via spending is limited.
"Broad-based resilience does not come at the expense of long-term profitability," Buch said in a speech.
The key issue is that current market valuations may not be accurately reflecting risk, so there is potential for a sudden repricing, and higher capital levels will then better protect banks.
"Traditional correlations linking macroeconomic shocks and credit risk may no longer hold," Buch said. "All of this indicates that markets are underpricing geopolitical risks."
In case of systemic shocks, like the pandemic or surging energy costs after Russia's invasion of Ukraine, governments often act in concert with central banks to mitigate risks.
However, debt levels are already high so it is not obvious authorities would be able to provide similar support in future crises, Buch added.
There are also no signs of widespread losses or credit supply constraints from banks being capital-constrained, so maintaining sufficient capital buffer requirements remains important.
The ECB will play its part by streamlining key supervisory activities and by assessing the effectiveness of its work.
But none of these changes should lead to laxer regulation, Buch argued.
"We do not need new regulatory frameworks, but we do need a commitment from legislators not to weaken the frameworks we have," Buch added.
(Reporting by Balazs Koranyi; Editing buy Toby Chopra)
Bank regulation refers to the laws and guidelines that govern the operations of banks to ensure their stability, protect consumers, and maintain the integrity of the financial system.
Capital requirements are regulations that require banks to hold a certain amount of capital reserves to cover potential losses, ensuring they remain solvent and can meet obligations.
Risk management is the process of identifying, assessing, and controlling threats to an organization's capital and earnings, including financial, operational, and reputational risks.
A euro zone bank is a financial institution that operates within the euro area, which consists of EU countries that have adopted the euro as their official currency.
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