The European Central Bank has published a Macroprudential Bulletin article introducing a framework to assess the severity and plausibility of adverse macro-financial scenarios used in EU-wide banking stress tests. The approach combines backward-looking indicators benchmarked against historical stress episodes with forward-looking, model-based metrics that quantify how far scenarios sit in the tail of projected outcomes, and it concludes that adverse scenarios have generally become more severe over time, with 2023 the peak in unadjusted measures while risk-adjusted methods can rank the 2025 scenario as slightly more severe. Backward-looking measures score scenario paths by comparing deviations from baseline projections and extreme values of key variables against historical regularities, and can be aggregated across variables and countries, including with weights based on estimated sensitivity to bank capital depletion. Forward-looking measures use a Bayesian panel vector autoregression across eight quarterly variables per euro area country and a divergence-based plausibility metric, where higher values imply lower plausibility and greater severity, with the metric around 0.81 for 2020, around 0.93 for 2023 and close to 0.90 for 2025. The article also extends the framework to adjust for financial conditions and systemic risk, including a growth-at-risk approach using a CISS-based financial stress index and a non-linear model with a cyclical systemic risk indicator, which together imply the 2025 scenario’s GDP path extends further into its predictive lower tail and can appear more severe once the starting risk environment is taken into account. The ECB positions the framework as a basis for future discussions on scenario severity, noting that operationalising it could improve the definition, monitoring and communication of severity in future European Banking Authority stress-testing exercises.
European Central Bank 2025-11-01
European Central Bank publishes framework to gauge EU-wide stress test scenario severity and finds 2025 adverse scenario most severe after risk adjustment
The European Central Bank's Macroprudential Bulletin introduces a framework to assess adverse macro-financial scenarios in EU banking stress tests. Combining historical and model-based metrics, it shows intensified scenarios, with 2023 as the peak in unadjusted measures and 2025 slightly more severe in risk-adjusted methods. The ECB suggests this framework could improve scenario severity definition and communication in future European Banking Authority stress tests.