European banks are more robust in 2025 than in 2023, according to the European Banking Authority (EBA) when it published its biennial banking stress test on Friday 1 August.
If an adverse macroeconomic scenario were to materialise, the 64 banks analysed (51 of which are based in the euro area), which account for 75% of total banking assets in the European Union, would suffer cumulative capital losses of €547 billion over three years. These losses would be distributed as follows: €394 billion from the materialisation of credit risk (€347 billion in 2023), €98 billion from market risk and €55 billion from operational risk.
This level of losses is admittedly higher in absolute terms than that observed in the 2023 edition of the previous stress test (see EUROPE 13232/12), but due to their increased capacity to generate income during the period under consideration, the absorption of losses by banks would be higher and the overall erosion of their capital (370 basis points) lower than in 2023.
The banks tested also entered the 2025 financial year in a better financial position, with a higher level of profitability than in 2023 and an average CET1 ratio of 15.8%.
Thus, by stabilising at 12.1% in the event of the adverse scenario materialising, the average CET1 capital ratio held by the banks tested would still enable them to continue financing the economy. If the full Basel III rules were applied during the test (the transitional phase runs until 2033), this ratio would fall to 11%. The average leverage ratio would fall from 5.8% to 4.9%, well above regulatory requirements.
It should be noted that, on an individual basis, none of the banks tested would see their CET1 capital ratio fall below the regulatory threshold if the adverse scenario materialised. Only one financial institution failed to meet the leverage ratio. However, seventeen banks are expected to adjust the maximum distributable amount, such as dividends or bonuses, that they can distribute as long as they comply with prudential requirements.
EBA’s adverse scenario for the period 2025-2027 is more severe than that observed during the 2008 financial crisis. The cumulative fall in GDP in the EU would be around -6.3%, while unemployment would rise by 5.8%. The macroeconomic context would be marked by fragmentation of trade, increased inflation and disruptions to supply chains fuelling the recession.
EBA points out that the purpose of the banking stress test is not to identify the banks that pass or fail the test, with the consequence of imposing additional capital requirements on those financial institutions that would appear to be the least capitalised in the event of the adverse scenario materialising. The main purpose of the test results is to feed into the regular monitoring of the banking groups under scrutiny by banking supervisors.
To see the results of the 2025 banking stress tests: https://aeur.eu/f/i3g (Original version in French by Mathieu Bion)