The European Banking Authority (EBA) has launched its 2025 EU-wide stress test and released the macroeconomic scenarios it will use for the exercise.
This year’s is designed to provide insight for assessing the resilience of the European banking sector in “the current uncertain and changing macroeconomic environment,” says the EBA. The exercise is taking place just as Donald Trump begins his second term as US President and uncertainty around conflict in the Middle East and Ukraine continues to threaten economic stability.
“The adverse scenario is based on a narrative of hypothetical worsening of geopolitical tensions, with large, negative, and persistent trade and confidence shocks having strong adverse effects on private consumption and investments, both domestically and globally,” it said in a statement. “The severe nature of the adverse scenario reflects the purpose of the stress test exercise, which is to assess the resilience of the European banking system to a hypothetical severely deteriorated macroeconomic environment.”
Scope of the exercise
The stress test assesses the solvency of EU banks in a hypothetical adverse macroeconomic scenario over a three-year period (2025-27). The objectives of the stress test are to:
- assess and compare the overall resilience of EU banks to relevant severe economic shocks;
- assess if bank capital levels are sufficient to ensure banks can support the economy in periods of stress;
- foster market discipline through transparent publication of consistent, granular and comparable data at a bank-by-bank level;
- provide input to the Supervisory Review and Evaluation Process (SREP).
The EU-wide stress test will be conducted on a sample of 64 banks, 51 of which are in countries under the Single Supervisory Mechanism (SSM) – incorporating around 75% of total banking sector assets in the EU and Norway.
Key elements of the scenarios
The adverse scenario is based on a hypothetical severe escalation of geopolitical tensions, accompanied by increasingly inward-looking trade policies globally, that cause an increase in energy and commodity prices, disruptions in the supply chain and adverse effects on private consumption and investment coupled with a worldwide economic contraction.
The results of the exercise are due to be published in early August.
Click here for further information about the stress test from the EBA.
