The European Central Bank’s next stress test will ask lenders to come up with hypothetical situations in which risks like trade disruptions or wars could hit their financial strength.
The exam next year will “assess which firm-specific geopolitical risk scenarios could severely impact their solvency,” Claudia Buch, who leads the ECB’s Supervisory Board, told European lawmakers on Tuesday in Brussels.
Buch has pushed lenders to improve their ability to grasp and withstand the fallout from so-called geopolitical risks since taking over as the ECB’s top banking watchdog last year. The focus appears prescient as US President Donald Trump’s tariff announcements upend global trade and various regions of the world are gripped by armed conflict.
The financial system “has so far remained resilient” following the announcement of US tariffs, Buch said. Still, the ECB is monitoring potential spillovers from outside the banking sector and lenders may also need to boost provisions for losses as the implications of higher tariffs becomes clear, she added.
European banks are currently undergoing a financial health review run by the European Banking Authority. In between those biennial exams, the ECB holds a so-called thematic stress test. Last year’s exercise simulated a hacker attack.
The ECB said the exam will be a so-called reverse stress test, where regulators determine a specific outcome and banks then have to identify sufficiently severe scenarios that would lead them to it.
Photograph: The European Central Bank headquarters beyond cargo trains and containers at a freight terminal in Frankfurt. Photo credit: Ben Kilb/Bloomberg
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