How prepared are euro area banks to identify and withstand geopolitical shocks that could threaten their capital positions?
The European Central Bank (ECB) has published the results of its 2026 thematic reverse stress test on geopolitical risks, covering 110 euro area banks under direct ECB supervision. The exercise — part of the ECB’s supervisory priorities for 2026–2028 — asked banks to design their own plausible geopolitical scenarios severe enough to result in a 300 basis point depletion of their CET1 ratio, rather than applying a common scenario to all institutions as in traditional stress tests.
Banks demonstrated the ability to produce economically meaningful scenarios reflecting their individual risk profiles, drawing on narratives such as military conflicts, trade and energy disruptions, sanctions, macroeconomic shocks and cyberattacks. However, the exercise also revealed areas for improvement: some banks showed insufficient granularity in risk assessments, inconsistencies between scenario narratives and their quantitative impact on solvency and liquidity, overly optimistic assumptions about mitigating actions under systemic stress, and an underdeveloped treatment of the interaction between solvency and liquidity risks. Cyber incidents and disruption of third-party service providers emerged as the most prominent non-financial risks, and the ECB calls on banks to integrate operational resilience and cyber risk considerations into their stress-testing frameworks alongside traditional financial risks. The results will feed into the ongoing supervisory dialogue and may inform qualitative assessments in the SREP. The exercise will not lead to adjustments in Pillar 2 guidance.
