Euro area banks resilient despite geopolitical stress test
ECB Banking Supervision concluded its 2025 solvency stress test for euro area significant institutions in August. The results show the banking sector is resilient against a severe but plausible economic downturn, with an aggregate CET1 ratio of 12.0% in the adverse scenario.
Geopolitical tensions test bank resilience
The adverse scenario for the 2025 stress test depicts an escalation of geopolitical tensions, disrupting trade channels and lowering global economic growth.
This includes inward-looking trade policies, higher energy and commodity prices, and fragmentation of the global supply system.
Banks project losses of €628 billion from deteriorating credit, market, and operational risks, an increase of €80 billion compared to the 2023 stress test.
This translates into an overall Common Equity Tier 1 (CET1) ratio depletion of 8.1 percentage points.
The system-level ratio of non-performing exposures (NPEs) to total exposures would increase from 1.7% at end-2024 to 5.8% at end-2027, reaching levels last seen in 2014.
Market risk contributes 1.3 percentage points to CET1 ratio depletion, mainly from fair value changes and counterparty credit risk losses.
Operational risk further reduces the CET1 capital ratio by around 0.6 percentage points.
Basel III rules and capital buffers cushion losses
The stress test incorporates the new Basel III rules through the revised Capital Requirements Regulation (CRR3), which entered into force on 1 January 2025.
These rules revise regulatory approaches for calculating risk exposure amounts (REA) and introduce an output floor.
Solid profitability is projected to cushion banks against losses, contributing 4.8 percentage points under the adverse scenario, an increase from 3.5 percentage points in the 2023 stress test.
The capital build-up over the past decade further supports bank resilience, with the aggregate CET1 ratio increasing by 4.9 percentage points to 16.0% at year-end 2024 from 11.1% in 2013.
The CET1 ratio depletion is somewhat lower in the 2025 exercise (4.0 percentage points) compared to 2023 (5.0 percentage points), mainly driven by improved profitability and scenario differences.
Resilience confirmed, but vigilance needed
The 2025 stress test confirms the euro area banking sector's robust capital position, providing reassurance amidst global uncertainties.
However, the report's emphasis on continued prudence and sensitivity analyses underscores that underlying vulnerabilities, particularly in commercial real estate and sovereign debt, demand ongoing supervisory attention.
The exercise highlights that while banks are stronger, the evolving risk landscape requires constant adaptation and proactive risk management.