- CET1 ratio of the banking system would stand at 12.0% at the end of the projection horizon in the adverse scenario, 4 percentage points lower than its starting point
- Strong profitability provides banks with solid buffer against increased projected losses
- Exercise covers 96 (51 large and 45 medium-sized) euro area banks under direct ECB supervision
The European Central Bank (ECB) published the results of its 2025 stress test, which shows that the euro area banking system is resilient against a severe economic downturn scenario. The system-wide depletion under the adverse scenario is predominantly driven by losses related to credit and market risk, along with reduced income generation by banks.
At the end of the three-year period considered in the stress test, under the adverse scenario, the 96 banks included in the exercise project losses of €628 billion ($717.8bn) from deteriorating credit, market and operational risk, an increase compared with the €548 billion in the 2023 stress test.
Despite these losses, capital depletion was lower than in previous stress tests. This milder outcome in terms of capital depletion is mainly due to banks entering the exercise with stronger profitability, driven by higher interest rates and stable asset quality. However, the sustainability of higher profits remains uncertain and may differ across banks.
The aggregate Common Equity Tier 1 (CET1) capital ratio, which is a key measure of a bank’s financial soundness, would fall to 12.0% following three years of stress under the prescribed adverse scenario, compared with 10.4% in the 2023 exercise. This corresponds to a decline in CET1 ratio of 4.0 percentage points compared with the starting point. At the end of 2027, the CET1 ratio would be 5.1 percentage points lower than in the baseline.
The outcome of the stress test suggests that current capital buffers are supportive of the euro area banking sector’s ability to withstand adverse shocks. The stress test took place against a backdrop of significant macro-financial uncertainty, reinforcing the case for continued prudence in capital planning and interpretation of results. Banks must continue strengthening their financial and operational resilience, including investing in IT and cyber resilience.
NBFI contagion
The ECB complemented the 2025 stress test with a counterparty credit risk (CCR) exploratory scenario analysis. This analysis examined how selected banks model CCR under diverse stress conditions and also aimed at better understanding the vulnerabilities stemming from interlinkages between the banking sector and non-bank financial institutions (NBFIs).
The analysis suggests that banks’ stressed CCR exposures net of collateral are particularly sizeable vis-à-vis non-financial corporations and US-based NBFIs. The level of collateralization in stressed CCR portfolios varies considerably across the banks. Furthermore, a scenario of euro depreciation against major foreign currencies tends to lead to higher CCR losses compared with a scenario of declining interest rates and with the EBA market risk scenario.
At the same time, specific “wrong way” risk, in which the exposure to a particular counterparty correlates with its own probability of default rather than with general market risks factors, appears to be relatively limited at the current juncture.