On 31 July 2026, the European Central Bank (ECB) published the results of its 2026 thematic reverse stress test on geopolitical risks, covering 110 euro area banks directly supervised by the ECB.
Background
As a key driver of macroeconomic uncertainty, geopolitical risk remains at the centre of the ECB’s supervisory priorities for 2026-28.
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. In particular, each bank was asked to identify the most relevant geopolitical risk events that could lead to at least a 300-basis point depletion in its Common Equity Tier 1 capital. In addition to reporting on how the geopolitical risk scenario would affect their solvency positions, banks were also asked to provide information about how it may affect their liquidity and funding conditions.
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, thus helping to reduce compliance costs.
Results
Whilst most banks produced reverse stress simulations that meaningfully translated economic scenarios into risk drivers, the exercise did reveal inconsistencies in the way some banks translated shocks into capital and liquidity impacts. For example, some banks appeared overly optimistic with regard to balance sheet expansions in the geopolitical stress scenarios and as such the ECB feels that it is important that banks’ stress tests are conducted under sufficiently prudent and scenario-consistent assumptions about balance sheet growth. In addition, while many banks produced a reasonable transmission of the geopolitical stress events into their liquidity and funding positions, several institutions did not project meaningful stress on their liquidity metrics despite the significant capital drawdown assumed in the scenarios.
Next steps
The results will feed into the ongoing supervisory dialogue with banks and may inform qualitative assessments in the Supervisory Review and Evaluation Process. The exercise will not lead to adjustments in Pillar 2 guidance or the leverage ratio Pillar 2 guidance.