European Central Bank sets out 2026 reverse stress test to gauge banks' vulnerability to geopolitical shocks

The European Central Bank published an interview with Supervisory Board member Sharon Donnery outlining how ECB banking supervision is intensifying its focus on geopolitical risk and uncertainty, including a 2026 reverse stress test. Banks are being asked to identify their most severe geopolitical scenarios, tailored to their business models and exposures, that would lead to a significant 300 basis point depletion in capital, with the ECB planning to publish a system-wide overview in the summer. Donnery said supervisory work is assessing how geopolitical events can transmit to banks through trade and macroeconomic shocks, financial market disruption, and operational threats such as cyberattacks, noting that the 2025 stress test on trade tensions showed the sector to be broadly resilient. The reverse exercise is intended to test banks’ scenario-planning frameworks and governance, inform bank-specific supervisory follow-up, and complement monitoring of sovereign and currency exposures and pockets of rising non-performing loans. She also argued that EU efforts to simplify capital buffer rules should not mechanically reduce required capital, described a shift to a more targeted multi-year supervisory cycle, and pointed to process changes such as a faster approval track for simpler securitisations while applying greater scrutiny to complex transactions, alongside expectations on AI controls and assurances that any future digital euro would not be used to monitor individual payments.