Good morning, everyone. Thank you for being here. Mr. Machado, thank you for attending our conference. As you know, Mr. Machado has been a member of the ECB Supervisory Board since March 2025. Today, we will be discussing key topics for the European banking sector, and there will be time at the end of the conversation for your questions, so please feel free to step in. Mr. Machado, I would like to start from the geopolitical situation. Strengthening banks' resilience to geopolitical risk and also macro-financial uncertainty in general is one of the ECB priorities for 2026, 2028. What does good geopolitical risk management look like for the regulator? I also wanted to ask about the reverse stress test on geopolitical risks that the ECB presented in terms of results at the end of July. Anything interesting that has surprised you from there? Mm-hmm. Thank you very much, Paola, and well, first of all, I have too much appreciation for having me this year again at your very prestigious conference, and also to be able to share in this session a few thoughts about supervision, supervisory priorities, but also about some of the recent developments in Europe as regards banks and supervision in particular. Going directly to your question, I will be supported by a slide deck that I prepared because I think it also illustrates much better also for the audience some of the work that is ongoing in terms of supervision, and how we are seeing not only addressing risks, but also ourselves, how we are also changing some of the approaches. I will now tackle directly your question on geopolitical risk. As you know, geopolitical risk has been at the forefront of the supervisory priorities already for a few years. We have always targeted this on a yearly basis, but within the realm of the three-year span over which we design and establish the supervisory priorities. This helps also to anchor the work, the expectations of banks in terms of supervisory work, but also of the teams, of the joint supervisory teams. In this regard, we have been, as I said, following consistently on this identification of geopolitical risk according to a certain established now framework for assessing geopolitical risk. I will come to a minute on the results of the reverse stress test of this year. I think this grid and this framework helps better understand what we mean when we talk about geopolitical risks and how we see it translating into the broader risk landscape that banks should be managing. As you can see, we have identified what we call the horizontal transversal risk drivers that might translate, or that might then translate in different channels. The channels range from the real economy to financial markets. I would also highlight that link to this, and this is a topic that we might also want to touch a bit later on, stains also the financial safety. But if you look as we approach this, we approach geopolitical risk along those transversal drivers and trying to see and asking banks how they see it translating into the typical through the channels that are identified there in the real economy and the financial markets, how we are seeing it translating into the established category of risks, ranging from business model, capital risk, capital adequacy risk, but in particular credit risk, market risk, and of course, operational risk in terms of, in particular, if we think about cyber resilience, for instance, or operation disruptions. How then this translates in the well-anchored taxonomy of risk which banks manage. In this year, on 2026, it is the year between the EU-wide stress test that we organized. The EU-wide stress tests are organized at the Euro area level, following a common scenario which is established. The last one was in 2025, and in these sort of gap years, we usually organize a stress test, which is organized by the ECB. This year, we organized a reverse stress test around the geopolitical risk, precisely. The differentiating factor or one of the differentiating factors of the reverse stress test is that it doesn't start from a common scenario as the EU-wide stress test starts. The reverse stress test starts with a target depletion or target scenario, which is provided by the ECB. In this case, it was provided a 300-basis-point depletion on CET1, and banks were asked to identify geopolitical scenarios that could translate into this depletion. So an event or a combination event which would be akin to a geopolitical risk and that which impact could translate into this 300 basis point deletion. So the outcome is already given to the banks. It is up to the banks then to identify, according to their business model, their profile, which could be the scenarios that came about under and coming up to these 300 basis points, which was, by the way, established as a floor, not as a ceiling. So banks could even work with a more severe scenario. Overall, we must say that, and the results have been published before summer. Overall, we can say that banks and the results were across the board satisfactory. But we must say that there were a few aspects that I would eventually also share with this audience and try to identify, and which maybe can eventually amount to fine-tuning and improvement on the side of banks. One of the things that struck was a bit sometimes the granularity and the sensitivity of the risk scenarios that banks came about. They were simply lacking this kind of granularity when they were communicated and then further developed. Also, the consistency between the scenario narrative and how this was then translating in terms of solvency and liquidity sometimes was not fully consistent in terms of several banks. And sometimes also we also noticed, because we were asking which kind of mitigating measures should be adopted, we were also noticing that sometimes some of, in the case of some banks, there was a few realism that was missing in terms of those mitigating measures. So these findings, which are, by the way, public, and that have been made public and not only at the level of the SSM in terms of aggregate, but are now being communicated through the joint supervisory teams, are going now to be further pursued in the bilateral dialogue with the teams. I think here, the element that I would just like to maybe stress here is that sometimes it's good to have scenario work with scenarios that are pretty much sensitive and granular so that you can also measure the type of impact that it can also have, and the interplay between solvency and, for instance, liquidity. That was one of the aspects that sometimes were missing in some of the banks, was this interlinkage between the solvency and liquidity aspects. We didn't saw enough detail on how the liquidity could be further impaired, in terms of the scenarios that were being designed and coming across with banks. But overall, I think also it's, and I stop here with this for the sake of time. I think it also shows our commitment, that we are living up to a commitment that was communicated at the end of last year, that we would be simplifying also this sort of exercises. These exercises were already, or this reverse stress exercise was very much based on the templates that I used for the ICAAP annual exercise. The data points in relation to other previous scenarios, involves circa one-third less data points that in previous exercises. I think this shows also the commitment to simplify this exercise and not to create additional burden on the side of banks and decide to integrate into exercises that banks have to pursue already, in this case, the ICAAP, and this is now being factored further into that work. Thank you. Connected with this question, credit quality has remained resilient. Obviously, the ECB continues to monitor, emphasize the importance of the prudent origination, risk-based pricing. Where do you see risks of, say, standard weakening? Is that commercial real estate leverage, private credit, or maybe just simply areas where the banks are competing particularly aggressively for loan growth? Yeah. That's a very interesting topic because, we sometimes tend to forget that credit underwriting standards are still very core to the bank's activities. If not, they are the soul and the blood, I would say, of bank activity, especially for the European banking sector, as we know. What we have designed in terms of supervisory priorities goes very much to the heart of ensuring that banks continue to run with prudent risk-taking and sound credit standards. For that was a thematic credit underwriting exercise that was launched in March this year. The banks have already received the request to submit data points for that exercise. That exercise, again, in the spirit of simplification, builds very much on the previous exercise of 2019. So it's not that banks will be subject to, I would say, material burdensome requests for this exercise. We want to understand, in particular in the corporate loan field some of the standards that are being followed by banks as regards origination of new loans for the corporate and SME sector. In particular, one thing that we hope that this exercise will contribute is to have a more standardized approach towards definition of new lending, but also in particular, when it comes to key risk indicators that we are missing. We are missing certain standardized practice across the board banks. This is important also then to one of the areas that we hope that this exercise will deliver in a meaningful way, which is benchmarking. We will start with a common definition on new lending. Also targeting then common key risk indicators so that we can come about a benchmarking exercise that then will be communicated on aggregate terms to banks, and will help, hopefully, banks also to situate themselves vis-à-vis peers in terms of the broader credit underwriting standards. It's not that because we are feeling that there has been a deterioration of the credit underwriting standards. We are not feeling that. We know that the level of NPLs remains quite. Low. Resilient and low. It's true, especially in the euro area compared. We see some pockets of deterioration in a few countries, but it doesn't mean that on aggregate terms, there is a deterioration of the NPL or that the credit underwriting standards are necessarily going through a less prudent way of being applied. It is in the good times that we should also try to address credit underwriting standards. As I said, one of the main objectives of this exercise is really to come about with a more standardized approach towards the definition of lending, which is missing, and in particular, to key risk indicators that help, hopefully then banks to improve in terms of the further benchmarking exercise. Interesting. Banks have started to, let's say, outsource and have transferred risk outside the banking sector more and more. Significant risk transfer can optimize capital management, create opportunity for new growth, but in a way, the risk does not disappear. How do you think about resilience across the wider financial system? In general, what's the ECB stance on the SRTs? There is one thing to start. We don't have any bias on securitization, in particular on SRTs. It's true that we know that the market has been dormant until recently, in particular until 2020 when there was a regulatory change to the SRT. But it's really picked up in the last, I would say, two years, in particular, 2025 already marked a significant takeoff, in particular on the synthetic securitization front. We don't see much happening in the traditional securitization for reasons that maybe have to lie particular, but also happy to hear the views, with cost, with also a certain risk appetite. But we are seeing, especially in the more capital-consuming part on loans, in particular on the corporate loans and SME, we are seeing a very significant pickup in terms of the synthetic risk transfer market. Actually, by 2023, the European market was already the biggest in the synthetic in the world, in world terms. This trend has now been deepening. I think we stand in terms of total outstanding amounts. At the end of 2025, we stood at around EUR 600 billion, comparing to 2022, which was around slightly above EUR 200 billion. So this is really a significant pickup from the market. We have been trying to analyze in terms of risks and the traditional risks that are attached to synthetic risk transfers in terms of rollover risk or flowback risk. We have not seen any particular material risks popping up on that front. The thing that we note regarding the synthetic risk transfer is missing data, and we don't see the transparency that we would really like to see, in particular vis-à-vis non-banking financial institutions. We are missing the data which would allow us to have the full picture in terms of who is taking this risk and whether there are some exposures of the banking sector to the NBFI sector vis-à-vis in the securitization transactions. This is something that we would really welcome to get more clarity and more insights in term. This is sometimes, as you know, a very opaque market when it comes to that. The spillover risk is something that we try to monitor constantly for the European banking sector. I think this has also been identified as one of the main risk drivers of this market by the Bank for International Settlements. The Bank for International Settlements has conducted several analyses, in particular the first half of the year, and has been particularly active on this. Just this said, with this in mind, I would just like to draw your attention to a blog post that was published last week. Yes By the ECB. Of course, this blog post is there to be assessed, scrutinized, but I think it's the outcome of a research by the ECB. I think there are two findings in this blog post. One already reflects a finding that we had already observed, and now it's translated into more for research, is the trend that banks have to be less active in following borrowers, which are in the portfolio that is earmarked for, or that is underlying the synthetic risk transfer. So we see a less active management by the borrower from the side of the banks. But the second is a trend that I think it's very important in terms of the broader discussion in Europe in terms of lending. The findings of the research that has been conducted point out that the increase in synthetic risk transfers leads to a higher dividend payout than to an improvement in terms of the corporate loans. So a rise in the corporate loan sector by banks. So meaning that banks use more the space that is offered in terms of capital by the synthetic risk transfers to increase their dividend payouts than to lend to the real economy. I think this is an important factor because we are listening, and rightly so. One of the efforts of simplifying the synthetic risk transfer, and by the way, also translated in the speed with which today we are approving these transactions. So we are passing, and this started this year from months to eight weeks, eight working weeks, to approve these transactions, provided they meet the simple criterion. But provided they meet, and several have met, we are really going at full speed to approve these transactions. But the narrative has been that these transactions are very much needed also to enhance the space for granting loans to the real economy. The findings that we are seeing go a bit in a different way, in a different direction. So I think it's important to retain these findings. As I said, the findings are there, are transparent. They are, of course, as any finding of a research, they are open for discussion. But I think it's, as I said, in this broader discussion that we're having on increasing lending capacity to the challenges of the European economy, but also in the broader competitiveness debate, I think it's important to retain these findings. Before moving to the next question, I would like to ask the audience to answer the first question we are asking in our survey. You have little remotes in your desks. Are you, as an investor, pricing in geopolitical risk for the banks? Yes, in terms of higher cost of equity. Yes, but mostly for banks with higher exposure to the risks, either via businesses or geographies. No, as it is not possible with current available data or market knowledge. No, as I expect this to be monitored by regulators, reflected in capital requirements already. One moment for the answers. Well, so clearly weighs a lot one way or another in- investors' view on the banks. Interesting. Moving on, but connected with geopolitical risk, cyber risk, the ECB's second priority focuses on operational resilience, robust ICT capabilities. Do you think the banks are investing enough in technology? Also, given banks rely more and more on a small number of cloud software data providers, do we think this can create a sort of concentration risk requiring maybe a more system-wide supervisory perspective? Mm-hmm. Well, operational resilience has been always ranking very high on the supervisory agenda, and for some reason, it has been consistently amongst the cluster of supervisory priorities as you. This is as we have simplified also a bit the supervisory priorities. Today, they are grouped in two clusters. The second cluster being those that are related to operational resilience. I think we benefited very much from findings that were conducted when we organized, a few years ago, the cyber resilience stress test. So again, in one of those gap years between EU-wide stress tests. We benefited quite much at the time already from the findings of that exercise to carry further work with the banks in terms of the broader operational resilience. Of course, in two years or almost three years, things have changed in very substantive terms. When this exercise was conducted, of course, we were not anticipating some of the developments. Nobody could anticipate that today are prompted by the development of artificial intelligence. I think in that regard, we are all trying to learn. Here, I think, we put ourselves at the same footing as banks are doing in terms of trying to learn the impact of these new technologies, and in particular, the new fast-evolving models of artificial intelligence. But cyber resilience, sorry, ICT security and cyber resilience against cyber attacks remained very high. We also noticed that, of course, they remain quite high on the agenda of banks, and that there is something that we have to appreciate that banks have conducted very meaningful work regarding cyber resilience. Maybe I think this can be better seen here with the operational risk events. If you look, 2025 marked a very important year because by all events that were impacting banks, it was a record year. Yet the losses that we saw have remained largely contained. I think this reveals that banks are taking seriously the issue of cyber resilience and ICT security. In that regard, I think it's sort of a positive development that we have to acknowledge. But of course, the cyber environment remains very challenging, and now we have these new challenges, as I said just now. These new challenges that are prompted by AI frontier models and with this capacity to interfere, to penetrate the sort of ICT systems and more broadly, also the sort of systems under which banks operate. When we see that banks are growing, you can see in terms of the broad evolution that is there on the right side of the slide. When we see that the adoption by banks of, sorry, I'm mixing up here. When you see in the right-hand side, the broader adoption by banks of digital technologies, in particular the ones which are AI-driven, not to mention of course the cloud one, which is already being adopted consistently over the last year. But in particular, the growing adoption of AI technologies, which are very much used in particular for fraud detection, credit scoring, very much used know your customer processes. When we see the growing adoption of AI, of course, this prompts us to also require banks to have full-fledged and consistent, robust AI strategies. One of the things that we see across the board many times in banks is that there is still a sort of lack of ownership over the adoption and deployment of AI strategies. It's not that it is not being sort of controlled at the level of the banks, but sometimes this form of holistic ownership is missing in many banks. I think it's very relevant that this is adopted on a full-fledged basis and consistently and meaningfully in the banks. Because, as I said, this is an area where we are seeing a huge potential, of course, for banks to create synergies to lower their costs. To be more efficient and in particular, vis-à-vis these customer-driven processes. But at the same time, this is also a huge source of cyber vulnerability. If the sort of architecture and the governance is scattered along the organization, the banks will be less effective in addressing these challenges. Both in terms of cloud adoption as in terms of AI adoption, it is of the essence not only to have sort of adequate governance, but then to be quite effective in terms of scenarios that are, of course, naturally driven by the dependency of third party, of a small third parties. What are the strategies to address sort of disruption of those third-party service providers if they would have to happen. These are in digitalization and AI. As I said, we are starting from a good basis. I want also to acknowledge the very consistent and robust effort that banks have been doing in terms of having an adequate cyber IT structure in place and robust and secure IT structure in place. But we have to acknowledge that these are very crucial challenges with which the banking industry is confronted, for which of course, sound risk management and governance are of the essence to cope with this new landscape with which we are all confronted with. As you said in a previous speech, technology is neutral, governance is not. Yeah. I think that's the meaning. Maybe before moving on, we can ask the audience the second question of the survey. Do you understand the cyber risks the banks are facing? No, it's impossible to fully understand them through publicly available information. No, there isn't enough disclosure yet. Yes, it's a reason not to invest in the sector. Yes, the banks have started to speak more about the risks, and they look more prepared. Let's see. Well, at least one answer was completely zero, but clearly, effectively, the disclosure and the complexity of the matter is obviously understandable, and equally, what you have just said regarding good resilience with more events maybe explains also the first point. Yeah. This discussion on technology and AI obviously brings us to another topic that I wanted to talk about. That is competitiveness. Scale is needed to invest, particularly in technology. Last July, the European Commission had launched a package of measures to strengthen the European banks' competitiveness and, therefore, ability to grow. What do you think about this effort? In particular, do you see it as something that is also necessary to deliver cross-border M&A in the sector? Yes. When we were talking last year or here, we were not yet confronted with what have been the findings of this communication by the Commission. Sometimes it's called the competitiveness report. I prefer to call it by its name. It's a communication. Usually, the Commission communications lay the ground for future legislative initiatives, and this is exactly the case. I think here, one of the main issues that is identified in terms of the sort of eventual obstacle or hampering competitiveness of the Euro banking sector, for me, remains a very core topic, and has always been remaining a very core topic along its various dimensions, is the fragmentation of the banking sector along national lines. I think this is an issue that we have in Europe to be confronted. It's not only a matter that we don't see enough, I would say, cross-border consolidation. We still are faced with very dismal cross-border consolidation, which you consider that it's not necessarily neutralizing or going against national models. In Europe, I think we have space for all sorts of models. I think we are, in that regard, having enough banks that cater for also the national realities and that address specific local realities. The question is a different one. If the European banking sector wants to gain scale, it cannot operate, or many of the banks can not only operate according to national lines in national markets. What we have been seeing in terms of consolidation, especially after the global financial crisis, remains mostly domestic-driven. We don't see cross-border consolidation unfolding. We are now seeing a sort of pick-up since last year on some projects on cross-border consolidation. Clearly, this is fundamental to drive further competitiveness and further scale of the European banking sector. I think there is something like, it was, I think, Frank Elderson that was last week in the Fireside chat in Berlin. One of the things that he mentioned there was this finding is that mostly 80% of the loans in Europe are domestic, so that banks thrive. In terms of deposits, I think we have something like 2% of the deposits that move cross-border. So it's frankly a very national, domestic, embedded reality that we still have. This contributes to the fact that with this, we don't gain enough scale in Europe for the investments that are needed. Whilst we operate under this reality, this is also to do with the fact that we don't see yet, although we have been able to accomplish the banking union for the first and second pillar, we still see very fragmented, also regulatory landscape. We see a lot of gold plating when it comes to a part of the banking regulation that has to be transposed via directive. So there is this part which is embedded in regulations, but we have then a part that has been transposed in national jurisdictions, and we see a lot of gold plating that contributes to hampering the way you have to do business. This translates in further costs for many of the banks, sometimes in terms of additional customer sort of regulation that exists in terms of additional reporting that has to be done. So we see as scattered. Of course, we are also missing the common deposit insurance scheme that would offer some much more safety in terms of deposits moving cross-border, and also for cross-border projects. Whilst these gaps remain, and with certain complexities that we have in the regulatory framework, of course, the competitiveness agenda is hampered in terms of the banking sector. Let me just mention that we have last year, in the high-level task force simplification, we acknowledged that in the capital stack, there is undue complexity. In particular, there is clearly room for, according to the Governing Council, but this is also something shared at the level of supervision. There is clearly room for the macroprudential buffers to be simplified. There is a concrete proposal that was offered in that regard to merge the five macroprudential buffers that we have today into two, a non-releasable buffer and a releasable buffer. This means that basically the capital conservation buffer could be merged with the O-SII and the G-SII buffer as a sort of non-releasable buffer, and the countercyclical and the systemic risk buffer could be merged into a single buffer as a releasable buffer. This is the sort of proposals that we also think could contribute to further streamline and sort of improve the competitiveness of the banking sector. I end here. Another topic which is very core if you read carefully the communication of the Commission, is the group approach that we are missing still for capital and liquidity waivers, for more consolidated requirements instead of individual requirements at subsidiary level. This is clearly something that we were missing. Hopefully, this will be now addressed in the legislative proposal. This is identified in very central terms by the Commission communication. Hopefully, this will be translated into more streamlined approach that also allows for more effective group management in terms of capital and liquidity in Europe, again, to restore and to improve European competitiveness. Thank you. Let's ask the third of the audience question now. Do you expect more cross-border M&A in European banking sector? No, there isn't enough commitment from national policymaker. No, as the opportunities for cross-border M&A value creation are still limited. Yes, but only in the medium or long term. Yes, relatively soon. Yes, please. Yes. There is an optimism. There is an optimism there. Regarding cross-border M&A, yeah. The policymaker weight at the moment is also undeniable. I think one last question to close. Some banks argue that European competitiveness problem is also linked to regulation. I think you touched upon this point of simplification. Already we discussed that last year on this very same stage. Can you give us an update of where do we stand, and maybe also if you have in mind the most important of the changes that you are implementing, and also what you would like to see on the banks' side? On the regulatory front, I think we are still now waiting for the legislative proposals that come from the Commission, which I think are going to the direction of addressing the complexity of the sort of capital framework that we have in place without necessarily hampering resilience. I think safeguarding resilience has always been an underlying principle, but let's see what comes out in terms of proposals regarding a simplification of the capital stack. As I said, we are very much eager to contribute to that discussion, and with concrete proposal, and to assess concrete proposals from our side. We are not, of course, the regulators or the policymakers, but happy to contribute to that debate. Now, in terms of supervision, in the meanwhile, we have been really streamlining supervision, and I'll just finish with this agenda to really demonstrate that there is a strong commitment in terms of simplification. Not only the SREP simplification process has been achieved. Implement It has been closed now. Now it's a matter of implementation throughout this year in the short term. But in particular, on the next level, supervision is where we are now devoting a lot of effort, and we are seeing already tangible progress, in particular, in terms of shortening certain of the deadlines with which for banks are very important on capital transactions, share buybacks, notably. But also on what I mentioned before on the fast-tracking of simple securitizations of SRTs. But also regarding more targeted focus in terms of our supervisory activities. In particular, I would just mention on-site inspections is not only the sole one, but also regarding not only on-site, but also internal model investigations. We are really streamlining, and I think this is becoming very tangible already throughout this year. This is, of course, underpinned then by a broader project on supervisory culture and measuring the effectiveness of our simplification agenda. There is no simplification, or there is no really meaningful agenda if we are not also able to measure the effectiveness of the measure that we are being proposed. So there is also a commitment not only to embed this with a sort of revisited supervisory culture, a project that is, as I said, is very much progressing, but also with a concrete measure that we will take seriously and eventually revisit where it is needed, as we are seeing that we are still falling short of what should be our effectiveness indicators and goals. Thank you. Unless there are some questions in the audience, very urgent one, we are running out of time, so I'll close here. Thank you. Thank you. Mr. Machado Thank you.