Claudia Buch: Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Thank you very much for inviting me to present the ECB's Annual Report on supervisory activities for 2025. The year was characterised by two main developments.

First, European banks have entered this phase of heightened geopolitical uncertainty with robust short-term indicators and strong capitalisation, while medium to long-term risks remain elevated.

Second, and in light of this, European banking supervision is further strengthening its risk-based approach. We are focusing on the most material risks with the aim of preserving the sector's resilience, and we are streamlining our supervisory activities to become more efficient and effective. Our Annual Report provides information on the comprehensive reform of European supervision that is currently underway.

The euro area banking sector continues to show solid levels of capitalisation, with significant institutions having an aggregate Common Equity Tier 1 (CET1) ratio of around 16%. There are no significant signs of deterioration in asset quality at the system level, as the share of non-performing loans remains relatively stable at around 2%. But there are limited pockets of vulnerability in segments such as commercial real estate and lending to small and medium-sized enterprises, and banks need to monitor exposures to sectors and firms that are particularly vulnerable to heightened risks. This is crucially important in the current geopolitical context, where the ongoing conflict in the Middle East adds layers of uncertainty and volatility to economic forecasts, has market impact, and could impair credit quality. This may impact banks' balance sheets at a later stage.