The European Central Bank published its 2025 Macroprudential stress test extension report (MaSTER), a top-down complement to the 2025 EU-wide bottom-up stress test, finding that euro area banks are resilient in the standard adverse scenario but that additional risk channels reveal pockets of vulnerability that support a cautious approach to capital buffers. MaSTER broadens the assessment beyond the EU-wide exercise’s methodological constraints, including the assumption that banks keep lending unchanged. Using a top-down banking sector model, the ECB estimates that under an adverse scenario featuring a prolonged recession, market slump and sticky inflation, banks would reduce lending, slightly improving capital ratios versus a constant-balance-sheet assumption but deepening the downturn via a credit squeeze, with an additional cumulative real GDP contraction of around 2 percentage points after three years. Releasing available macroprudential buffers offsets some pressure on credit supply, although the impact is modest given the currently limited size of releasable buffers. A system-wide model suggests non-bank balance sheet adjustments could amplify price declines, with investment funds facing the largest losses; for banks, the additional average Common Equity Tier 1 (CET1) depletion is limited due to hedging, but banks with weaker hedging can be affected more significantly. For climate risk, adding transition and flood-related physical risk to the scenario increases projected credit risk losses by around 70 basis points in each case, with transition losses largely driven by exposures to energy-intensive sectors; overall net capital depletion rises slightly once all extensions are combined, but remains below the final outcome of the 2023 stress test.
European Central Bank 2025-11-19
European Central Bank publishes MaSTER stress test extension highlighting climate and non-bank contagion vulnerabilities and supporting caution on capital buffers
The European Central Bank's 2025 Macroprudential stress test extension report (MaSTER) shows euro area banks are resilient under standard adverse scenarios but vulnerable in additional risk channels, advising caution with capital buffers. A prolonged recession would lead banks to reduce lending, slightly improving capital ratios but worsening the downturn through a credit squeeze. Climate risk scenarios indicate increased credit risk losses, especially from energy-intensive sectors, though overall net capital depletion remains below 2023 stress test outcomes.