European banks risk undermining their own competitiveness if they fail to pursue digital innovation, according to Patrick Montagner, who set out the European Central Bank’s supervisory approach to new technologies in a keynote speech in Brussels on Tuesday. While supervisors welcome faster adoption of tools such as artificial intelligence and tokenisation, Montagner stressed that innovation must be matched by robust governance to safeguard financial stability across the euro area.
Speaking at the 10th Annual FinTech and Regulation Conference, Montagner argued that “standing still means falling behind” in a banking sector facing mounting pressure from fintechs, neobanks and large technology companies. For euro area supervisors, the challenge is no longer whether banks should innovate, but how to ensure innovation strengthens resilience rather than creating new systemic risks.
The speech comes as the ECB weighs the long-term implications of digitalisation for the banking system, including the design of the digital euro and Europe’s dependence on non-European technology providers.
Innovation welcomed, but not at any cost
Montagner said supervisors actively encourage banks to invest in digital transformation, noting that internal ECB analysis shows spending on digitalisation is associated with both higher costs and higher profitability. However, he warned against innovation that exploits regulatory gaps or is pursued without a clear business case.
Artificial intelligence featured prominently. According to Montagner, more than 85 percent of banks under ECB supervision already use AI, with generative AI adoption accelerating across IT operations, legal analysis and customer-facing applications. While many institutions believe existing governance frameworks are sufficient, supervisors see significant gaps, particularly around data quality, explainability and accountability for AI-driven decisions.
He highlighted the risk of so-called “reward hacking”, where advanced AI systems optimise performance metrics in ways that undermine their intended purpose. For banks, this means governance cannot stop at initial testing, but must include continuous monitoring and clear human responsibility throughout a system’s life cycle.
Another concern is concentration risk. Generative AI models are often supplied by a small number of non-EU providers, exposing banks to geopolitical, operational and data protection vulnerabilities. Montagner said the ECB is using the implementation of the EU’s AI Act to push banks to address these risks early, before AI use becomes systemic.
Tokenisation, stablecoins and the digital euro
On tokenisation, Montagner struck a cautious but open tone. While still limited in scale, tokenisation of deposits and securities could improve efficiency and open new business models, particularly if banks act as trusted intermediaries. But he stressed that such initiatives should form part of a coherent strategy aligned with each bank’s risk appetite.
He drew a clear distinction between tokenised deposits and stablecoins. Tokenised deposits, he said, preserve banks’ funding and lending capacity and could enable programmable payments and more efficient settlement. Stablecoins, by contrast, carry higher liquidity, operational and compliance risks. Euro-denominated stablecoins remain marginal, with limited use cases outside the crypto ecosystem.
The digital euro was presented as a separate, public-sector anchor for innovation. Montagner said a digital euro would combine the safety of central bank money with the efficiency of electronic payments, offering online and offline functionality, strong privacy safeguards and instant settlement across the euro area. By reducing reliance on international card schemes and non-European wallet providers, it could also help banks scale up payment services at lower cost.
Regulation as an enabler
A central theme of the speech was that regulation enables, rather than stifles, innovation by creating a shared language for managing risk. Montagner pointed to the Digital Operational Resilience Act, MiCAR and the AI Act as frameworks that allow supervisors and banks to assess interconnected risks consistently.
He cited digital fraud as a concrete example. According to ECB and European Banking Authority data, payment fraud across the European Economic Area reached €4.2 billion in 2024, much of it linked to social engineering and cross-border activity. Such patterns, he argued, underline the need for sector-wide information sharing and coordinated responses.
Looking ahead, Montagner said ECB supervision will continue to focus on generative AI, third-party dependencies and operational resilience. Innovation, he concluded, is essential for Europe’s banking sector and economy, but only if pursued with discipline. “European banking supervision is moving with the transformation,” he said, “by enabling banks to be both stable and innovative.”