European Banking Authority’s Stress Tests

MILAN (Reuters) – The European Banking Authority (EBA) announced on Monday that it will evaluate how European banks respond to theoretical increases in geopolitical tensions and subsequent trade wars in an upcoming industry health check.

The simulation will assume a significant impact on the European economy due to geopolitical and trade disruptions, beginning as Donald Trump takes office as U.S. president, with plans to reassess trade relations with key partners.

In this latest round of “stress tests,” covering 64 banks that represent three-quarters of banking assets in the European Union and Norway, the EBA plans to release the results at the start of August.

Of these 64 banks, 51 are from countries supervised by the European Central Bank (ECB). The ECB will also conduct parallel stress tests on banks not overseen by the EBA.

The EBA will assess the banks’ stability under a worst-case scenario projecting a cumulative 6.3% decline in real GDP across the EU between 2024 and 2027 due to geopolitical shocks.

In this scenario, trade tension-induced supply shocks are expected to sharply raise inflation, though subsequent declines in confidence, employment, and consumer spending will temper price increases.

The banks participating in the tests received necessary documentation on Monday and must submit their final answers by early July, with interim deadlines leading up to that date.

The EBA’s last stress test results were published in 2023, approximately ten years after the initiation of comprehensive assessments of the bloc’s lenders, prior to the ECB assuming its role as the single banking supervisor in 2014.

These tests are essential for banking supervisors to evaluate the capital requirements of lenders to withstand potential losses and bolster the economy during crises, with outcomes contributing to the supervisory process.