European Central Bank Banking Supervision published the results of its 2025 stress test, finding the euro area banking system resilient to a severe economic downturn. Under the adverse scenario, the aggregate Common Equity Tier 1 (CET1) ratio across the tested banks is projected to decline by 4.0 percentage points from the starting point to 12.0% over the three-year horizon, with profitability acting as the main buffer against higher projected losses. The exercise covers 96 euro area banks under direct ECB supervision (51 large banks also in the European Banking Authority’s EU-wide sample and 45 medium-sized banks outside it), representing around 83% of euro area banking assets. Banks project €628 billion in losses from credit, market and operational risk in the adverse scenario (vs €548 billion in the 2023 stress test), while capital depletion is lower than in past exercises, mainly reflecting stronger starting profitability linked to higher interest rates and stable asset quality. Credit and market risk are the main drivers of depletion, with loan loss provisions and higher risk exposure amounts detracting 5.0 and 1.1 percentage points from CET1 respectively, market risk contributing 1.3 percentage points and operational risk and other profit and loss effects around 0.7 percentage points, partly offset by 4.8 percentage points of net revenues. The stress scenario assumes elevated geopolitical tensions and inward-looking trade policies, higher energy prices and supply chain fragmentation, followed by weaker growth and asset price and real estate valuation corrections, and the report includes sensitivity analyses that indicate banks’ models capture sectoral vulnerabilities only to a certain extent. Results will feed into the annual Supervisory Review and Evaluation Process (SREP), with qualitative findings on data quality and governance used in supervisors’ assessments and the quantitative outcome used as a starting point for setting bank-specific Pillar 2 guidance (including a leverage ratio Pillar 2 guidance for certain banks). The ECB also flagged follow-on supervisory work, including more in-depth on-site inspections for selected banks focused on stress testing capabilities, and a counterparty credit risk exploratory scenario whose findings will inform supervisory dialogue without producing a capital depletion figure.
European Central Bank - Banking Supervision 2025-08-01
European Central Bank Banking Supervision publishes 2025 stress test results showing euro area banks’ CET1 would fall to 12.0% in adverse scenario
The European Central Bank's 2025 stress test shows the euro area banking system's resilience, with the CET1 ratio dropping by 4.0 points to 12.0% under a severe downturn. Covering 96 banks, it reveals €628 billion in projected losses, mainly from credit and market risks, but with less capital depletion due to strong initial profitability. Findings will inform the Supervisory Review and Evaluation Process (SREP) and guide further supervisory actions.