The European Central Bank (ECB) is set to rigorously examine the financial fortitude of 96 significant banks within the euro area in 2025. This comprehensive assessment includes 51 of the largest institutions, representing approximately 75% of the euro area’s total banking assets, as part of the broader EU-wide stress test led by the European Banking Authority (EBA). In addition to this extensive EU-wide evaluation, the ECB will also conduct a parallel stress test on 45 medium-sized banks that fall outside the EBA’s primary sample due to their size. The findings from both of these critical exercises are scheduled for publication in early August 2025. These results will provide crucial insights into how these financial institutions would withstand hypothetical but severe economic downturns, highlighting their resilience under challenging macroeconomic scenarios.
The EBA is coordinating the EU-wide stress test in close collaboration with the ECB and other national supervisory bodies within the European Union that are outside the Single Supervisory Mechanism. This coordinated effort will employ the established EBA stress test methodology and templates, utilizing economic scenarios developed by the European Systemic Risk Board. These scenarios are designed to simulate significant economic shocks, allowing for a standardized assessment across the European banking sector.
The EU-wide stress test will adopt a bottom-up approach, enhanced with certain top-down elements to ensure thoroughness and consistency. Participating banks will utilize their internal models to project the impacts of the stress scenarios on their financial health. These projections will be subjected to stringent rules and a detailed review by the relevant supervisory authorities. This review process will incorporate supervisory models used to benchmark key risk parameters across different geographical regions and business models, ensuring a level playing field and consistent evaluation standards. For the 45 medium-sized banks being tested directly by the ECB, the methodology will align with the EBA’s EU-wide framework, adjusted to reflect the generally smaller scale and complexity of these institutions, ensuring a proportionate and effective assessment.
A key enhancement for the 2025 stress test is the ECB’s intensified scrutiny of submissions that appear insufficiently prudent. Past stress tests have revealed instances where bank projections seemed overly optimistic, potentially understating the true impact of stress scenarios given their specific risk profiles. To address this, the ECB will implement a more rigorous review process for submissions that raise concerns about prudence. Banks exhibiting such tendencies will face heightened scrutiny throughout the quality assurance phase, which may include on-site inspections to gain a deeper understanding of their stress testing practices and underlying data. The insights derived from these on-site visits, combined with the overall quality assurance outcomes, could lead to further on-site inspections post-stress test conclusion. These follow-up inspections would aim to pinpoint structural weaknesses within a bank’s stress testing framework and drive improvements in their stress testing capabilities. For banks that consistently fail to rectify identified issues in their stress testing frameworks, a clearly defined escalation process may lead to more stringent supervisory measures in subsequent stress test exercises, ensuring continuous improvement and robust risk management across the banking sector.
The outcomes of the stress tests are not just an academic exercise; they directly inform the Supervisory Review and Evaluation Process (SREP) and will be used to update each bank’s Pillar 2 guidance. Recognizing the critical role of sound risk data aggregation and reporting in a bank’s overall resilience, the 2025 stress test will place a significant emphasis on evaluating the quality of data provided by the banks. The ECB has made it clear that it may require banks to remediate any significant deficiencies identified in their data reporting. Such findings will have a direct bearing on the SREP assessment. Furthermore, qualitative findings related to weaknesses in a bank’s stress testing practices can negatively influence their scores concerning risk data aggregation capabilities, potentially impacting their Pillar 2 requirements. Beyond individual bank supervision, the stress test results will also serve broader macroprudential purposes, allowing the ECB to assess the wider macroprudential implications for the entire euro area, contributing to the overall financial stability of the region.
In a significant addition for the 2025 stress test, the ECB will incorporate a detailed scenario analysis focusing on counterparty credit risk (CCR) for a select group of banks. This targeted analysis aims to evaluate how effectively banks model CCR under stressed market conditions and to assess their potential vulnerabilities stemming from interconnectedness with non-bank financial intermediaries. This deeper understanding is crucial for addressing identified shortcomings in banks’ credit risk and CCR management frameworks, aligning with the SSM supervisory priorities for 2024-2026 and 2025-2027. The insights gained from this CCR scenario analysis will directly enhance day-to-day supervision, refining vulnerability assessments within CCR portfolios and improving evaluations of banks’ stress testing practices in this specific area. While this exploratory exercise will not have immediate capital implications, it is expected to inform the SREP process in the future. The aggregated results of this CCR exploratory scenario will be published alongside the overall ECB stress test results in early August, providing a comprehensive view of bank resilience and risk management practices across the euro area, ensuring the stability and integrity of the financial system, even considering potential impacts equivalent to a hypothetical amount of 96 Euro per account across the assessed institutions in a severe economic downturn.
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