Donnery: Geopolitical risks demand new bank stress tests

Donnery emphasized that geopolitical risk, while not new, has intensified, manifesting through economic shocks like trade tariffs, financial market disruptions, and operational threats such as cyberattacks.

While last year's stress test focused on a single scenario of trade tensions, this year's approach is a reverse stress test.

This new method requires banks to identify severe scenarios that would deplete their capital by 300 basis points, considering their unique business models, country and currency exposures, and customer bases.

The objective is to prompt banks to scrutinize their internal scenario planning and board-level awareness of geopolitical impacts.

The SSM will collect this information and publish an overview report in the summer, aiming to understand broader banking system exposures to these evolving risks.

The challenge for supervisors and banks alike is the unpredictability of future shocks and their differential impact across institutions.

Donnery addressed specific concerns, including a Deutsche Bank note on potential US bond sell-offs by European investors, stating that sovereign and currency exposures are continuously monitored for market disruption risks.

Regarding the euro's strength, she clarified that supervisors do not forecast exchange rates but monitor their impact on sectors like SMEs.

Despite some small pockets of increasing non-performing loans, particularly in certain sub-sectors, the banking sector has shown broad resilience since the 2008 financial crisis.

Donnery reflected on her career, noting that shocks are recurrent and manifest in diverse ways, from Brexit and COVID-19 to the war in Ukraine and the 2023 banking turmoil.

This experience underscores the critical importance of both financial and operational resilience, with the latter gaining prominence over the last 10-15 years.

She concluded that resilience is paramount, as is the role of central banks and supervisors as crisis managers.