The European Central Bank published research extending the 2025 EU-wide banking sector stress test with a climate risk analysis for non-financial corporations, using top-down models to incorporate both transition and acute physical risks into credit risk projections. Using an adverse macroeconomic backdrop that combines the European Banking Authority’s adverse scenario with the Network for Greening the Financial System’s Nationally Determined Contributions scenario, the analysis finds that climate-related losses can have a moderate but consequential effect on banks’ capital ratios and may identify different pockets of vulnerability than the standard EU-wide assessment. For transition risk over 2025-27, the article models firm-level green investments needed to shift the energy mix, translating higher leverage and lower profitability into higher probabilities of default and loan losses, with the largest effects in high energy-intensive sectors. On average, firms’ probabilities of default rise by 50%, with a median increase of 91% in high energy-intensive sectors, and the additional credit losses from banks’ non-financial corporate portfolios reduce system-level Common Equity Tier 1 (CET1) ratios by 74 basis points. A separate sensitivity analysis of acute physical risk focuses on widespread flood events, calibrating impacts using a borrower-level river-flooding risk score and granular assumptions about affected municipalities and firms; it estimates an additional 77 basis point CET1 depletion beyond the EBA adverse scenario, taking aggregate depletion to 487 basis points, with losses exceeding 200 basis points for 7% of banks. The article situates the work alongside ongoing supervisory initiatives, noting that the European Supervisory Authorities’ consultation on draft guidelines for stress testing environmental, social and governance risks closed on 19 September 2025, with final guidance expected in the first few months of 2026, and that the European Banking Authority plans a gradual integration of climate risks into the EU-wide stress-testing framework starting with a partial “combined approach” in 2027.
European Central Bank 2025-11-19
European Central Bank analysis adds climate transition and flood shocks to the 2025 EU-wide stress test and estimates 74 and 77 basis point CET1 impacts
The European Central Bank extended the 2025 EU-wide banking stress test with a climate risk analysis for non-financial corporations, incorporating transition and acute physical risks. Climate-related losses can moderately impact banks' capital ratios, significantly affecting high energy-intensive sectors, reducing system-level Common Equity Tier 1 ratios by 74 basis points. Acute physical risk from floods could further deplete CET1 ratios by 77 basis points, highlighting different vulnerabilities than the standard EU-wide assessment.