European Central Bank Supervisory Board member Patrick Montagner outlined weaknesses identified in the 2026 geopolitical reverse stress test and called for more agile, complementary testing approaches in a keynote speech at a European Systemic Risk Board workshop on scenario design. Banks developed plausible scenarios that would deplete their Common Equity Tier 1 ratios by at least 300 basis points. Some assessments lacked granularity, did not adequately translate scenarios into solvency and liquidity metrics, or relied on mitigating actions that were not always credible. The exercise extends the focus beyond the common adverse geopolitical scenario used in 2025 to vulnerabilities specific to each bank’s business model and exposures. Montagner emphasized that asset sales, capital raising or lending reductions may become less feasible when several institutions pursue them simultaneously under stressed market conditions. Banks’ internal tests should inform capital and liquidity planning, strategy and contingency arrangements, with boards and senior management challenging scenarios and proposed responses. Alongside comparable supervisory tests supporting capital assessments, faster sensitivity exercises and targeted analysis can assess emerging risks. Existing ECB and European Banking Authority simplification efforts aim to streamline requirements with limited supervisory value and free resources for analysis and interpretation. For risks spanning financial sectors, Montagner highlighted the European Systemic Risk Board’s existing project to develop a desktop system-wide stress test by 2028. Such exercises should examine how common exposures, collateral calls and simultaneous institutional responses amplify shocks, including risks that originate outside banking and return through funding markets or counterparties. He advocated starting with focused, interpretable exercises and expanding them as data improve. For artificial intelligence investment, the initial priority is to map leverage, financing providers and overlapping equity and credit exposures before developing more elaborate loss estimates.
European Central Bank identifies weaknesses in geopolitical reverse stress testing and calls for broader risk analysis
European Central Bank Supervisory Board member Patrick Montagner highlighted weaknesses in banks’ 2026 geopolitical reverse stress tests, including insufficiently granular assessments and unrealistic mitigating actions against scenarios depleting capital ratios by at least 300 basis points. Speaking at a European Systemic Risk Board workshop, he advocated faster targeted exercises alongside established capital tests. He also emphasized analysis across financial sectors to capture how simultaneous responses and links between banks and nonbank institutions can amplify shocks.