The European Central Bank published an article in its Macroprudential Bulletin using its BEAST top-down stress testing framework to re-run the adverse scenario of the 2025 EU-wide stress test with banks’ behavioural reactions and macro-financial feedback effects. The analysis finds that allowing banks to adjust balance sheets delivers only a modest improvement in aggregate capital ratios, while triggering credit supply contractions that deepen the downturn, whereas releasing releasable macroprudential buffers reduces incentives to deleverage and mitigates the GDP impact. Under a constant balance sheet assumption, the BEAST simulation produces a 3.5 percentage point decline in the banking system’s Common Equity Tier 1 (CET1) ratio over the three-year horizon, broadly aligned with the EU-wide stress test outcome (4.0 percentage points), with fewer banks breaching the maximum distributable amount (MDA) trigger by year three (18 versus 24). If banks are allowed to deleverage without modelling feedback to the real economy, CET1 ratios rise by 0.83 percentage points relative to the constant balance sheet case and eight additional banks avoid breaching buffers, driven mainly by reductions in risk-weighted assets despite lower net interest income. Once the feedback loop is activated, deleveraging is estimated to worsen real GDP by around 2 percentage points after three years and increases overall capital depletion by 0.27 percentage points versus the no-feedback case, leaving CET1 still 0.56 percentage points higher than under the constant balance sheet assumption. A simulated full release of the countercyclical capital buffer and systemic risk buffer, together equivalent to 0.8% at system level, increases credit and GDP by 1.3% and 0.3% after three years versus no release, reduces the decline in credit by about 1.25 percentage points and lowers the GDP reduction by 0.26 percentage points, while also reducing the number of banks breaching MDA triggers despite a slightly lower aggregate CET1 ratio due to reduced capital requirements.
European Central Bank 2025-11-19
European Central Bank publishes BEAST simulations showing macroprudential buffer releases can curb procyclical deleveraging in stress
The European Central Bank's Macroprudential Bulletin re-ran the 2025 EU-wide stress test using the BEAST framework, showing banks' balance sheet adjustments modestly improve capital ratios but trigger credit supply contractions. Allowing banks to deleverage without real economy feedback increases CET1 ratios but worsens GDP by 2 percentage points when feedback is considered. Releasing macroprudential buffers mitigates GDP impact and reduces MDA breaches, despite a slight decrease in aggregate CET1 ratios.