ECB Proposes Lighter Supervisory Framework for Smaller European Banks

The European Central Bank is proposing a broader and more proportionate supervisory framework for small and non-complex banks, potentially bringing around 150 additional institutions within the lighter regime.

The proposals, outlined by ECB Executive Board member and Supervisory Board Vice-Chair Frank Elderson, would expand the existing framework for small and non-complex institutions (SNCIs) rather than creating a separate regulatory regime for smaller banks.

The current SNCI framework covers about 75% of less significant institutions under European banking supervision, representing more than 1,400 entities as of December 2025.

Under the proposed changes, national authorities could be permitted to increase the current €5 billion total-assets threshold for SNCI classification to as much as €10 billion, depending on the size and structure of their domestic banking markets. Changes would also address technical criteria that currently prevent some relatively simple banks from qualifying.

The ECB estimates that the changes could increase the proportion of less significant institutions covered by the SNCI framework to around 85%, bringing approximately 150 additional banks into the category.

Supervisory requirements would also be adjusted. For some institutions, the Supervisory Review and Evaluation Process could be conducted less frequently, with certain banks potentially going two or three years without a full SREP where their risk profile permits.

The ECB is also proposing to reduce the burden associated with stress testing. Regular bottom-up stress tests, in which banks produce their own projections, could be conducted selectively for SNCIs, with supervisors relying more extensively on centrally conducted top-down exercises. The change could reduce the workload for almost 1,000 institutions.

Reporting requirements would also be substantially reduced. The ECB said planned changes could eventually reduce the number of financial reporting data points required from SNCIs from approximately 13,500 to around 700.

The proposals include greater flexibility over governance arrangements. Depending on a bank's size, complexity and risk profile, certain board committees could be combined, while risk management and compliance functions could also be combined where appropriate.

The ECB is additionally considering proportionate treatment of remuneration requirements, including possible exemptions from certain requirements relating to deferred variable remuneration and remuneration paid in financial instruments.

The proposed changes form part of a wider European effort to simplify banking regulation and supervision while maintaining prudential safeguards.

Elderson said smaller banks remain exposed to risks including geopolitical developments, cyber threats, digitalisation and climate and nature-related risks. The ECB therefore intends to retain risk-based supervision rather than introduce a framework based solely on the size of an institution.

Some of the proposed measures could be implemented by supervisors under the existing framework, while others would require changes to EU legislation or action by other European authorities.

The ECB has not identified individual national markets that would use a higher €5 billion threshold. The application of the proposed framework would depend on the relevant European and national rules and supervisory assessments.

The proposals are part of the ECB's broader simplification programme, which seeks to reduce unnecessary administrative requirements while maintaining the resilience of Europe's banking system.

By fLEXI tEAM