The European Central Bank published a working paper introducing the Multiple macro-financial stress scenario Simulation Engine, or MuSE, an econometric framework that generates thousands of internally consistent adverse scenarios for top-down stress tests. Applying the scenarios to a model based on recent EU-wide stress tests, the paper finds that shocks originating in equity markets and sovereign debt markets have the greatest potential to deplete euro area banks’ capital ratios under current conditions. MuSE combines a nonparametric copula based on daily financial indicators, a forward-looking financial stress index and a multicountry Bayesian vector autoregressive model to translate one-year financial shocks into three-year macro-financial scenarios. Tests based on past crisis patterns show that 2008-type confidence and financial-market shocks are the most disruptive overall, while 2011-type sovereign stress particularly affects traditional lenders and universal banks. Scenarios based on 2022 geopolitical and monetary tightening shocks produce lower tail losses, while recent French sovereign-market disruption has a more muted systemwide effect.
European Central Bank2026-08-05
European Central Bank working paper introduces multiple-scenario stress-testing engine, finds equity and sovereign shocks pose greatest bank capital risk
A European Central Bank working paper introduces MuSE, a framework for generating thousands of internally consistent adverse scenarios for top-down stress testing. Its application indicates that equity-market and sovereign shocks pose the greatest risk to euro area bank capital, with 2008-type financial stress producing the largest overall depletion.