Sector proves resilient in face of trade shocks and recession scenario
European banks remain strong enough to withstand a prolonged economic downturn caused by global trade conflicts and geopolitical instability, according to the European Banking Authority (EBA). The agency’s latest stress test, covering 64 major lenders across the European Union, showed that no bank would breach its core capital requirements under an adverse three-year scenario, and only one would fall short on leverage ratio.
The results were seen as a validation of the sector’s increased resilience since the 2008 financial crisis. “The EU banking system could withstand a severe but plausible macroeconomic scenario,” the EBA stated, citing the capital buffers built up in recent years. Authorities stressed, however, that banks should continue to maintain strong capital positions given the uncertainty ahead.
Simulated recession reveals sector-wide losses but stability
The adverse scenario modeled a cumulative 6.3% contraction in EU GDP from 2025 through 2027, driven by rising energy prices, disrupted supply chains, and reduced investment tied to escalating trade and geopolitical tensions. Despite the severity of the projection, no bank was found to be at risk of systemic failure.
The EBA estimated that the stress scenario would lead to a total loss of 547 billion euros across the tested banks, higher than the 496 billion forecast in last year’s assessment. The average core capital ratio would drop from 15.8% to 12.1% by 2027. Although no names were officially identified, EBA data revealed that Germany’s Landesbank Baden-Württemberg, Credit Agricole, and La Banque Postale would experience some of the largest capital depletions.
Capital buffers hold firm even for worst-hit lenders
Individual disclosures by major banks reflected mixed but manageable outcomes. Deutsche Bank’s capital ratio would fall to 10.2% under the adverse scenario, still above regulatory minimums. Commerzbank projected a 2027 ratio of 10.5%, while Italy’s Intesa Sanpaolo reported 12%, above the scenario average.
Stress test results are not pass/fail, but they play a key role in supervisory assessments. The findings feed into the annual Pillar 2 process, where the European Central Bank adjusts capital guidance and dividend limitations based on perceived risks. Seventeen banks may face payout restrictions during the period.
Supervisors remain cautious amid evolving threats
Although the results are encouraging, regulators noted that some elements of the adverse scenario have already started to emerge. These include U.S. tariffs, instability in the Middle East, and broader protectionist trends, all of which could increase economic strain.
The European Central Bank confirmed it had conducted parallel tests on 96 eurozone banks and smaller lenders, reinforcing confidence in system-wide resilience. Nevertheless, supervisors are urging institutions to stay vigilant and preserve capital in preparation for potential shocks that extend beyond current projections.
