European banks face a paradox: the greatest risk may be failing to innovate. In his keynote at the 10th Annual FinTech and Regulation Conference, Patrick Montagner emphasized that innovation is critical for economic growth, competitiveness, and resilience in the banking sector—but it must be carefully managed to safeguard financial stability.
Innovation and Competition:
Digital transformation is reshaping banking. Artificial intelligence (AI), tokenisation of assets, and new digital payment systems are creating opportunities, while neobanks, fintechs, and big tech firms intensify competition. Traditional banks, protected by regulatory barriers and branch networks, are increasingly vulnerable if they fail to innovate. Montagner stressed that banks should pursue innovation that adds value, strengthens resilience, and aligns with strategic objectives.
Artificial Intelligence:
Over 85% of supervised banks now use AI, including generative AI for IT operations, legal analysis, and credit decisions. While AI can improve efficiency and fraud detection, Montagner warned of risks such as reward hacking, unexpected AI behavior, and systemic dependencies on a few non-EU providers. Banks must maintain robust governance, ongoing monitoring, and human accountability to manage AI risks effectively.
Tokenisation and Digital Assets:
Tokenisation—digitally representing deposits, securities, or other assets—offers operational efficiency and new strategic opportunities. Montagner differentiated between tokenised deposits, which preserve banks’ funding capacity, and stablecoins, which carry higher liquidity, cyber, and compliance risks. Banks should adopt a strategic, risk-aligned approach and ensure tokenised and traditional solutions can operate side by side.
The Digital Euro:
Montagner highlighted the digital euro as a transformative initiative that combines the safety of cash with the efficiency of electronic payments. By providing an open, pan-European infrastructure, it will enable banks to scale services, reduce costs, and foster innovation, while decreasing reliance on non-European payment providers.
Regulation as a Tool for Innovation:
Regulations such as the Digital Operational Resilience Act (DORA), Markets in Crypto-Assets Regulation (MiCAR), and the AI Act provide a common language for risk management. They help banks and supervisors assess interconnected risks—cybersecurity, AI, and third-party dependencies—consistently, promote coordination, and strengthen sector-wide resilience.
Conclusion:
Montagner concluded that innovation is essential for banks and the European economy, but must be paired with robust governance, forward-looking risk management, and regulatory alignment. AI, tokenisation, and the digital euro can transform banking, but supervisors must ensure that these technologies enhance stability rather than threaten it. European banking supervision aims to enable banks to be both innovative and resilient, keeping pace with the rapidly evolving digital landscape.
(ecb.europa.eu)
