ECB to Conduct Reverse Stress Test on Eurozone Banks in Response to Geopolitical Risks

The European Central Bank (ECB) announced on December 12, 2025, plans to conduct a reverse stress test in early 2026, targeting 110 of the eurozone's largest banks. This initiative aims to evaluate how extreme geopolitical shocks could impact these institutions.

In this reverse stress test, banks are required to identify scenarios that would lead to a 300 basis-point reduction in their Common Equity Tier 1 (CET1) capital. Additionally, they must assess the effects on their liquidity and funding conditions. The exercise is designed to enhance banks' risk management capabilities, particularly in reverse stress testing, and to ensure they have robust capital and recovery plans in place. While the results, expected by summer 2026, will not directly influence capital requirements, any identified vulnerabilities may inform the ECB's Supervisory Review and Evaluation Process (SREP), potentially leading to recommendations for higher capital buffers.

Reverse stress testing is a risk management technique where banks identify scenarios that could lead to significant financial distress or failure. Unlike traditional stress tests that apply predefined adverse scenarios, reverse stress tests start with a specific adverse outcome and work backward to determine the events that could cause such a result. This approach helps institutions uncover vulnerabilities that might not be evident through conventional stress testing methods.

The ECB's focus on geopolitical risks aligns with its supervisory priorities for 2026-2028, recognizing that such risks can impact various aspects of banking operations, including credit, market, liquidity, and operational risks.

In parallel, the ECB has proposed simplifying EU banking regulations by consolidating capital buffers into two main components: a non-releasable buffer and a releasable buffer. This aims to streamline the regulatory framework without reducing overall capital requirements.

Additionally, the European Banking Authority (EBA) published the results of its 2025 EU-wide stress test, confirming that European banks remain resilient even under severe hypothetical economic downturns. The adverse scenario involved a sharp deterioration in the global macro-financial environment, driven by a resurgence in geopolitical tensions and trade fragmentation.

The ECB's reverse stress test underscores the growing recognition of geopolitical risks as significant threats to financial stability. By proactively assessing these risks, the ECB aims to ensure that banks are better prepared to withstand potential shocks, thereby safeguarding the broader economy. This initiative may also influence banks to enhance their risk management frameworks and recovery planning, ultimately contributing to a more resilient financial system.