On 12 December 2025, the European Central Bank (ECB) announced it will carry out a reverse stress test in 2026 for 110 directly supervised banks to evaluate their ability to manage geopolitical risks. Unlike standard stress tests, the reverse stress test prescribes a pre-determined outcome—here, a minimum 300-basis point depletion in Common Equity Tier 1 (CET1) capital—and asks banks to identify the scenarios that could trigger it.
Key points of the exercise:
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Objective: Assess how geopolitical risks, which can affect credit, market, liquidity, operational, governance, and business model risks, could materially impact banks.
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Scenario design: Banks must define relevant geopolitical events, quantify their impact on solvency, liquidity, and funding, and outline mitigating actions to ensure robust governance and operational resilience.
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Integration with existing processes: The exercise will be conducted within the 2026 Internal Capital Adequacy Assessment Process (ICAAP), using existing supervisory data templates to ensure cost efficiency.
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Supervisory context: The stress test complements the 2025 EBA stress test, focusing on banks’ individual risk management capabilities rather than a common scenario. Results will be used qualitatively to inform the Supervisory Review and Evaluation Process (SREP), without direct Pillar 2 Guidance implications.
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Outcome: The ECB will communicate aggregated conclusions in summer 2026, highlighting banks’ preparedness to incorporate geopolitical risks into stress-testing frameworks, capital planning, and risk data management.
This exercise underscores the ECB’s focus on macroeconomic uncertainty and the importance of integrating geopolitical risk into banks’ strategic and operational risk management for 2026–2028.
