European Central Bank Banking Supervision sets 300 basis point threshold for geopolitical reverse stress test and reviews credit underwriting

In an interview with Die Presse, Anneli Tuominen, a member of the Supervisory Board of the European Central Bank Banking Supervision, outlined supervisory priorities and ongoing work, including a planned reverse stress test focused on geopolitical risks and a thematic review of banks’ credit underwriting practices. She argued that European banks are materially stronger than when European banking supervision was created, while identifying geopolitical uncertainty and operational resilience as the most pressing vulnerabilities. Tuominen cited an increase in the Common Equity Tier 1 ratio from 12.7% to 16.2% and a fall in non-performing loans from 7.5% to 1.9%, alongside improved profitability, with return on equity at 9.5% at the end of last year versus a 5.4% average in 2015-21. Operational resilience remains a supervisory focus amid rising cyberattacks, with targeted reviews, on-site inspections and cyber stress tests. On commercial real estate, on-site inspections found collateral valuations were not always correct and raised concerns about interest-only loans, with Austria highlighted as relatively high risk in certain banks; she also noted the market is “not out of the woods yet”. The geopolitical reverse stress test is planned for this year and will ask banks to identify the scenario that would lead to a 300 basis point capital depletion. The thematic review of credit underwriting is under way and includes a data collection exercise to assess whether lending standards remain robust.