In a Reuters interview, European Central Bank Banking Supervision Supervisory Board member Pedro Machado said the ECB is closely monitoring banks’ exposures linked to the Israel-Iran conflict and related market risks, and confirmed that the 2026 geopolitical reverse stress test will be a capital-driven exercise. He also signalled closer supervisory monitoring of risk transfers, particularly the growth in synthetic securitisations. Machado reported that the aggregate exposure of significant institutions to Israel and Iran is modest at around 0.7% of Common Equity Tier 1 capital (CET1) on the assets side and 0.6% on the liabilities side, with exposures including neighbouring countries slightly below 1% of supervised entities’ total assets, and no stress currently observed in Turkey where some European banks have subsidiaries. The 2026 reverse stress test will not include a liquidity element, but banks will be asked for complementary liquidity and funding information, and supervisors expect banks to embed geopolitical shocks in capital planning and internal stress-testing frameworks. On foreign-currency and US dollar funding, the ECB reviews currency and tenor risk limits, hedging and collateral management, and the inclusion of foreign-currency shocks in the internal capital adequacy assessment process (ICAAP) and liquidity metrics, with the option to tighten limits and require remediation if mismatches or stress-testing weaknesses are detected; no current stress was seen in US funding or access to US capital markets. On synthetic securitisations, Machado pointed to an 85% rise in structures between the first half of 2024 and the first half of 2025 and said the ECB intends to collect transaction-level information through applications to build an aggregate view of volumes and potential exposures returning to banks, including through financing, while highlighting rollover risk from maturity mismatches between insured portfolios and credit-protection tenors. He also cited the absence of a European deposit insurance scheme (EDIS) as a continuing obstacle to banking union and cross-border activity, alongside legal, tax and accounting divergences, and set out the ECB’s approach to mergers, “acting in concert” assessments and fit-and-proper reassessments, which depend on the legal framework and new facts rather than speculation. Machado outlined potential areas for legislative reform of Additional Tier 1 (AT1) instruments, including more forward-looking triggers, tighter call conditions and more equity-like remuneration features, and said artificial intelligence can support supervisory analysis but cannot lawfully replace human-led supervisory decision-making, with data quality and model governance remaining key supervisory expectations for banks.
European Central Bank - Banking Supervision 2026-03-05
European Central Bank Banking Supervision outlines 2026 geopolitical reverse stress test and steps up scrutiny of synthetic securitisations
The European Central Bank (ECB) is monitoring banks' exposures to the Israel-Iran conflict and plans a capital-driven geopolitical reverse stress test in 2026. Supervisory Board member Pedro Machado noted modest exposure levels to Israel and Iran, stressed the need for banks to incorporate geopolitical shocks into capital planning, and highlighted a rise in synthetic securitisations. Machado also mentioned the lack of a European deposit insurance scheme as a barrier to banking union and outlined potential legislative reforms for Additional Tier 1 instruments.