Eurozone banks must prepare for an extraordinary shock that would cause severe disruptions with far-reaching consequences for financial systems, the European Central Bank said on Tuesday as it outlined its supervisory priorities over the next three years.
The ECB has long argued that banks face a new reality with more frequent shocks from tariffs to cyberattacks, requiring them to prepare for multiple scenarios without knowing the exact nature of the next crisis.
This requires healthy capital buffers, state-of-the-art technological infrastructure, an active management that is attuned to financial realities, and greater intervention.
Unprecedented risk of extreme, low-probability events
“Geopolitical tensions and trade policies, climate and nature-related crises, demographic change and technological disruptions are increasing structural risks, making extreme, low-probability events unusually high,” the ECB said in a statement.
This is why strengthening banks’ resilience to political risk and uncertainty will remain a top priority for ECB supervision, with a focus on prudent risk-taking and sound investment, the ECB said.
Given the unpredictable nature of these risks, the ECB plans to conduct a reverse stress test, in which it will project the level of capital shortfalls and ask each bank to come up with scenarios that could cause them.
Exposure to geopolitical risk
“It will also help to identify how geopolitical risk scenarios are likely to impact banks’ funding and liquidity conditions,” the ECB said.
Banks are told to look at their exposure to other countries through overseas operations and through exporters and foreign currencies.
Reuters reported Last week came as European officials mulled measures to improve banks’ resilience with the dollar funding gap as they assessed possible contingencies of a U.S. currency shortfall.
Talking later a Press At the conference, the ECB’s chief supervisor, Claudia Buch, said banks’ liquidity position had been “comfortable” but their reliance on financial markets for funding could be at risk in times of crisis.
For now, though, banks are doing well.
Shares .sx7p They remain below historic peaks but are up 46 percent since the start of the year and banks are not trading below book value, a constant concern for supervisors in recent years.
Banks are proving too flexible In their actionsProfits are strong and asset quality is stable, thanks in part to stable economic growth and steady inflation, the ECB said.
This is because their overall capital requirements will remain stable this year and a non-binding buffer, known as Pillar 2 guidance, will actually ease the way.
The bank said the overall Common Equity Tier 1 capital requirement and applicable guidance will remain stable at 11.2 percent in 2026.
A benign environment is unlikely
Such a benign environment is unlikely, the ECB said.
“Significant downside risks remain, particularly as a result of US-EU trade tensions and broader geopolitical risks, which could affect sectors with high export volumes in the United States, such as the automotive, chemicals or pharmaceuticals sectors, potentially leading to a decline in asset quality,” the ECB said.
Financial markets are also vulnerable to sudden corrections with policymakers warning that asset prices do not accurately reflect political risk, leading to overpricing.
The ECB said it will scrutinize banks’ credit underwriting standards to prevent the emergence of bad loans.
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