The European Banking Authority (EBA) has officially launched its 2025 EU-wide stress test, aimed at evaluating the resilience of the European banking sector under both baseline and adverse economic scenarios over a three-year horizon, from 2025 to 2027.
The stress test will assess how 64 EU banks—representing approximately 75% of the total banking assets in the EU and Norway—would perform in the face of a hypothetical adverse macroeconomic scenario. The testing will focus on banks’ ability to withstand severe geopolitical and financial shocks, with the adverse scenario designed to simulate an escalation in geopolitical tensions, a decline in global trade, and substantial economic disruptions.
Severe Adverse Scenario Designed to Challenge Banks’ Resilience
The adverse scenario reflects a major geopolitical crisis that results in a severe economic downturn, with EU GDP expected to shrink by 6.3% cumulatively over the three-year period. The EBA notes that this scenario is specifically designed to ensure a comprehensive and severe assessment of potential economic shocks, which would affect various sectors of the economy, private consumption, and investment on both a domestic and global scale.
In this adverse environment, inflation is projected to rise sharply in 2025 and 2026, reaching 5.0% and 3.5% respectively before easing to 1.9% by 2027. Unemployment in the EU is expected to rise by 6.1 percentage points by the end of the test period. The negative effects of the geopolitical crisis will also cause disruptions in global supply chains, increase energy and commodity prices, and lead to a sharp contraction in worldwide economic activity.
Bank Performance Under Sectoral Shocks
The stress test will include a detailed breakdown of the impact on Gross Value Added (GVA) across 16 economic sectors. This detailed sectoral data will allow regulators to better understand how different banks, depending on their business models and sectoral exposures, would fare in the face of specific economic shocks.
EBA officials have emphasized that the stress test is not just a risk management tool for the banking sector, but also a mechanism to ensure that banks are adequately capitalized to support the economy during times of financial stress.
Objectives and Transparency
The key objectives of the 2025 stress test are to:
- Assess the overall resilience of EU banks to severe economic shocks
- Evaluate whether bank capital levels are sufficient to absorb potential losses
- Foster market discipline through the transparent publication of granular, comparable data at a bank-by-bank level
- Provide valuable input to the Supervisory Review and Evaluation Process (SREP) conducted by national supervisory authorities.
The results of the exercise will be published in early August 2025, providing a clear picture of the banking sector’s ability to withstand a hypothetical severe downturn.
Scope of the Exercise
The exercise will cover a sample of 64 banks, including 51 banks from countries within the Single Supervisory Mechanism (SSM), which ensures that the stress test covers a broad and representative portion of the EU banking landscape. This extensive coverage will help policymakers and the public gauge how well European financial institutions are prepared for adverse economic conditions.
Looking Ahead
The 2025 EU-wide stress test comes at a critical time, as the global economic landscape continues to face uncertainty due to geopolitical tensions, trade policy changes, and inflationary pressures. The EBA’s stress test is an important step in ensuring that the European banking sector remains resilient, adequately capitalized, and capable of supporting the economy in times of crisis.
As the results approach, attention will likely focus on how individual banks are positioned to navigate these turbulent conditions, providing crucial insights into the health and stability of the financial system.