ADM NEWS | The European Central Bank (ECB) has urged EU banks to strengthen their preparedness for geopolitical shocks, calling on them to conduct internal stress tests to assess the impact of conflicts and trade tensions on their capital positions and take preventive measures to mitigate potential risks.
Claudia Buch, Chair of the ECB’s Supervisory Board, told the European Parliament’s Committee on Economic and Monetary Affairs that banks should identify geopolitical risk events that could cut Common Equity Tier 1 (CET1) capital by at least 300 basis points and set out what preventive measures they would take to reduce the impact.
She noted that eurozone banks are entering a phase of “rising geopolitical uncertainty”, while maintaining strong capital levels. She noted that significant institutions had an aggregate Common Equity Tier 1 ratio of around 16 percent, while the share of non-performing loans remained stable at around 2 percent. Even so, Buch cautioned that vulnerabilities remained in areas including commercial real estate and lending to small and medium-sized enterprises.
Buch explained that this move marks a reversal from the 2025 EU-wide stress test, which assessed a common downturn scenario linked to geopolitical frictions and protectionist measures. Buch argued that the new approach would give supervisors a better view of how individual lenders assessed their own exposure to geopolitical threats.
The ECB also signalled concern that banks could come under pressure to weaken lending standards as competition intensifies and loan losses remain relatively contained.
Buch stated that supervisors would examine underwriting standards more closely to assess whether lending terms still matched underlying risks. While there was no clear evidence of widespread deterioration, she noted that available data remained incomplete, making it harder for banks to benchmark themselves against the market.
Alongside the tougher stance on risk, Buch said the ECB was streamlining parts of its supervisory work to focus more on material threats to resilience.
She stated that additional supervisory reporting collected each year as part of individual bank assessments had been reduced by about 20 percent. The ECB is also standardising processes including capital decisions, internal model approvals, fit and proper assessments and onsite inspections, with the aim of speeding up lower-risk cases while devoting more attention to complex and potentially systemic issues.
Buch argued that banks’ solid profitability gave them a window to invest in IT, digitalisation and operational resilience at a time when the sector was facing more frequent cyberattacks, growing use of artificial intelligence and rising dependence on outsourced critical services.
She also reiterated that fully implementing Basel III should remain a policy priority and renewed calls for deeper European market integration, a common deposit protection system and a stronger liquidity backstop for banks in resolution.
For now, the ECB’s main message was that resilience cannot be taken for granted. Stronger capital and stable asset quality have given euro area banks a buffer, but supervisors are increasingly focused on the risks that may emerge only after geopolitical and economic strains have filtered through to the financial system.
➤ WAM
