The European Central Bank has published the results of its 2025 EU-wide stress test, confirming that banks across the region remain resilient even under a severe hypothetical economic downturn. However, some doubt the exercise supports banks’ risk management decisions.
Despite projected losses totalling €628bn because of deteriorating credit, market and operational risk, compared to €548bn in the 2023 exercise, the ECB found that capital depletion was lower than in previous stress tests.
Fernando de la Mora, co-head of financial services at Alvarez & Marsal, said the stress test’s outcome aligned with expectations but doubted its relevance to individual banks’ ability to improve risk management.
“As expected, ECB stress test results do not generate any surprises and demonstrate strong capital resilience of the banking sector . . . [but] banks continue to be disappointed with the current dynamics of the stress test exercise,” he said.
“The ECB has a pre-established view of each individual bank’s capital depletion and drives quality assurance to deliver on expected stress test outcomes, ignoring bank internal results. Given constrained assumptions, no insight is gained for risk management purposes.”
The results varied across the region. De la Mora noted that banks operating in countries with weaker income generation saw higher capital depletion, with Ireland, Denmark and France among the most impacted. In contrast, Norway, Portugal and Sweden recorded the lowest levels of common equity tier one depletion.
The stress test led to a decline in banks’ average CET1 capital ratio, a key measure of financial strength, from 16 per cent to 12 per cent over the three-year period, though still higher than the previous 10.4 per cent.
Banks entered the 2025 stress test in a stronger position than in previous years, supported by solid profitability on the back of higher interest rates.
The largest EU lenders reported near-record profits in 2024, with an average return on equity of 10.5 per cent. Asset quality remained strong with the average non-performing loan ratio at 1.9 per cent, according to figures from the European Banking Authority.
De la Mora added that banks’ resilience could support further capital returns to shareholders. “We expect increases in bank dividends and buybacks from European banks, but not as large as those from US banks favoured by strong deregulation.”
Held every two years, the stress tests assess the resilience of major Eurozone lenders under adverse scenarios over a three-year period and help guide supervisory expectations and capital planning across the region’s banking sector.
The 96 banks included in the exercise represent about 83 per cent of banking assets in the Eurozone.
The scenario modelled a global recession triggered by rising geopolitical tensions, increased trade barriers such as rising tariffs and ongoing supply chain disruptions.
Credit and market risk were the main sources of capital depletion, driven by declining loan quality and shocks to financial market valuations.