The European Central Bank (ECB) today published the results of its 2026 thematic reverse stress test on geopolitical risks, covering 110 euro area banks directly supervised by the ECB.
The exercise forms part of the ECB’s broader supervisory work on geopolitical risk, which is a supervisory priority for 2026-28. The aim is to strengthen banks’ forward-looking risk management and stress-testing capabilities in an environment of heightened geopolitical uncertainty.
The exercise required banks to conduct a reverse stress test, asking them to identify plausible geopolitical scenarios that would be severe enough to materially affect their capital positions. Banks were generally able to produce economically meaningful stress scenarios reflecting their individual vulnerabilities. However, the exercise also highlighted areas where further improvements are needed. These include the granularity and sensitivity of risk assessments, the consistency between scenario narratives and their translation into solvency and liquidity impacts, the realism of mitigating actions, particularly under systemic crisis situations caused by heightened geopolitical conditions, as well as the articulation of solvency-liquidity interactions in stress-testing frameworks.
The 2026 exercise applied a reverse stress-testing methodology. Banks were given a target of 300 basis points depletion of their Common Equity Tier 1 (CET1) ratio and were asked to design scenarios with a geopolitical risk narrative that would result in such an outcome. This approach fundamentally differs from traditional stress tests, like the biennial EU-wide stress test led by the European Banking Authority, where all banks face the same scenario. In a traditional stress test, the focus is on measuring the quantitative impact on capital. In a reverse stress test, by contrast, the emphasis is on banks’ ability to analyse more broadly how geopolitical risks could affect their business models.
In line with the ECB’s efforts to streamline supervisory processes, the stress test simulation replaced an annual stress test that banks would otherwise have had to submit as part of their internal capital adequacy assessment process (ICAAP), thus helping to reduce compliance costs.
