Euro area banks resilient to severe downturn, ECB stress test finds

ECB Banking Supervision has concluded its 2025 solvency stress test for euro area significant institutions, involving 51 directly supervised by the ECB in the EU-wide test and a further 45 in a parallel ECB-coordinated exercise.

The test assesses banks' ability to withstand financial and economic shocks over three years (2025-27), starting with 2024 year-end data.

The adverse scenario depicts an aggravation 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, making the scenario particularly pertinent given recent discussions around tariffs.

The scenario leads to heightened uncertainty, a loss of confidence, and a significant contraction in real economic growth, coupled with rising market interest rates, increased volatility, and significant corrections in financial asset prices and real estate valuations.

The exercise also incorporates the implications of the revised Capital Requirements Regulation (CRR3), which entered into force on 1 January 2025, requiring banks to provide restated values in accordance with these new rules for their 2024 year-end starting points.

This forward-looking perspective is a key tool for identifying risks and understanding potential vulnerabilities in the financial system, especially amidst current global political and economic uncertainty.

Under the adverse scenario, euro area banks project cumulative losses of €628 billion from deteriorating credit, market, and operational risks over the three-year horizon, an increase of €80 billion compared to the 2023 stress test.

This translates into an aggregate Common Equity Tier 1 (CET1) ratio depletion of 8.1 percentage points.

Loan loss provisions and risk exposure amount (REA) increases contribute significantly, by 5.0 and 1.1 percentage points respectively, as macroeconomic shocks impact borrowers' debt servicing capacity.

The system-level ratio of non-performing exposures (NPEs) is projected to rise from 1.7% at end-2024 to 5.8% by end-2027.

Market risk contributes 1.3 percentage points to CET1 depletion, while operational risk reduces it by 0.6 percentage points.

Solid profitability is expected to cushion these losses, with net revenues contributing 4.8 percentage points as a buffer, an improvement from 3.5 percentage points in the 2023 stress test.

The banking sector's increased capital build-up since the inception of the Single Supervisory Mechanism (SSM) in 2014 further supports this resilience, with the aggregate CET1 ratio rising from 11.1% in 2013 to 16.0% at year-end 2024.

The system-level CET1 ratio would stand at 12.0% in the adverse scenario and 17.1% in the baseline at the end of the projection horizon.