The EBA tested how 64 European banks, including 51 in the euro zone, would react to a prolonged recession across the EU and found none would breach their core capital requirement, and only one would breach its leverage requirement.
AIB, Bank of Ireland, Barclays Bank Ireland, Citibank Holdings Ireland and Bank of America Europe DAC were among the banks subject to the stress test exercise.
Domhnall Cullinan, the Central Bank of Ireland’s director of banking & payments supervision, said: “On balance, the scenario in use for the EU area is broadly aligned with the 2023 exercise but the impact of the stress test is milder than the results from that exercise. This is mainly due to banks entering the exercise with stronger profitability, and stable asset quality.
“Despite prevailing uncertainty, the benefits of resilience built up in recent years are evident, with banks having sufficient capital to absorb the impact of the severe scenario. Given the uncertainty, there remains a need to maintain and continue to build resilience, both financial and non-financial.”
The Central Bank of Ireland pointed out that the stress test is not a pass or fail exercise, and no threshold is set to define the failure or success of banks. Instead, the findings inform the 2025 Supervisory Review and Evaluation Process for banks, which is conducted by joint supervisory teams made up of staff from the European Central Bank as well as the Central Bank in Dublin.
The EBA concluded that the results indicate the EU banking system could withstand a severe but plausible macroeconomic scenario, reflecting the resilience built up in recent years, but it urged lenders to maintain adequate capital.
European and American banking authorities introduced stress tests after the global financial crisis of 2008 which led to costly bailouts of banks, with Irish taxpayers among those left to pick up the tab.
Some elements of the adverse scenario used in the stress tests have already begun to materialise, the EBA pointed out, citing US President Donald Trump’s tariffs and the heightened conflicts in the Middle East.
Lenders accounting for three quarters of EU banks’ total assets took part in the exercise, which simulates the losses they could incur by looking at their performance over a three-year period, using both a baseline and an adverse scenario.
Under the latter, worsening geopolitical tensions and protectionist trade policies lead to an increase in energy and commodity prices, disrupt supply chains, and depress consumption and investment. This all leads to a 6.3pc contraction in EU economic output between 2025 and 2027.
On aggregate, the main capital ratio of the 64 lenders tested fell by 3.7 percentage points to 12.1pc under an adverse scenario. That was less than the 4.59 percentage-point decrease in the last exam two years ago, which did feature more banks.
Most of Europe’s big banks saw a smaller erosion of their common equity Tier 1 ratio than in the last exam. Deutsche Bank saw its hit narrow to 3.78 percentage points from 5.28, while the impact at BNP Paribas narrowed to 2.79 percentage points from 3.92.
Additional reporting: Reuters and Bloomberg