ECB finds euro area banks resilient under adverse stress test scenario

The European Central Bank (ECB) and the European Banking Authority (EBA) on Friday published the results of the 2025 EU-wide stress test, showing that the euro area banking sector is resilient even under a severe economic downturn scenario.

Following the publication of the results, the Bank of Cyprus (BoC) announced that it achieved its best-ever outcome in this year’s stress test, reflecting what it described as a very strong balance sheet quality, profitability, and robust capital base.

“The Bank of Cyprus has achieved the highest level of result in all three of the key assessment indicators,” the bank said.

The stress test was conducted by the EBA in cooperation with the ECB and national supervisory authorities.

The Bank of Cyprus participated in the exercise as part of the sample of the smaller financial institutions in the euro area supervised by the Single Supervisory Mechanism (SSM).

“This year’s outcome places the Bank of Cyprus in bucket 1, the highest level, for maximum CET1 ratio depletion, minimum CET1 ratio, and minimum Tier 1 leverage ratio,” the bank said.

The bank added that it had achieved a maximum Common Equity Tier 1 (CET1) ratio depletion of less than 300 basis points, a minimum CET1 ratio of at least 14 per cent, and a minimum Tier 1 leverage ratio of at least 6 per cent.

“This result has only been achieved by six out of the 45 SSM banks that took part in the exercise,” the bank said.

The stress test is not a pass-or-fail exercise but is instead intended to provide information about the resilience of the European banking sector under an uncertain and changing macroeconomic environment.

According to the ECB, the adverse scenario assumed an escalation in geopolitical tensions, causing significant, negative, and prolonged impacts on trade and confidence that affect private consumption and investment at both national and global levels.

At the end of the three-year projection horizon in the adverse scenario, the ECB said the aggregate CET1 ratio of the euro area banking system would stand at 12 per cent, four percentage points lower than its starting point.

The ECB said the exercise covered 96 euro area banks under its direct supervision, including 51 large banks assessed by the EBA and 45 medium-sized banks such as the Bank of Cyprus.

The banks tested projected combined losses of €628 billion from deteriorating credit, market, and operational risk, which was an increase from the €548 billion recorded in the 2023 stress test.

Despite these losses, the ECB said capital depletion was lower than in previous stress tests because the banks began the exercise with stronger profitability driven by higher interest rates and stable asset quality.

“The outcome of the stress test suggests that current capital buffers are supportive of the euro area banking sector’s ability to withstand adverse shocks,” the ECB said.

The ECB added that the results of the exercise will feed into the Supervisory Review and Evaluation Process (SREP), with the maximum CET1 capital depletion determining each bank’s Pillar 2 guidance level.

The ECB also explained that the adverse scenario incorporated hypothetical shocks including higher energy prices, fragmented global supply chains, heightened uncertainty, loss of confidence, and significant contractions in real economic growth.

The ECB’s results showed that the system-wide depletion under the adverse scenario was primarily driven by credit and market risk losses, along with reduced income generation.

The aggregate leverage ratio of euro area banks decreased by 0.9 percentage points under the adverse scenario, ending at 5.0 per cent, well above the minimum requirement of 3 per cent.

The ECB confirmed that banks will continue to be encouraged to strengthen their financial and operational resilience, including investments in IT and cyber resilience, in light of the findings.