FRANKFURT, Dec 12 (Reuters) – The European Central Bank will ask 110 of the euro zone’s biggest banks to check how major geopolitical shocks would affect their business and what action would be needed to minimise the impact, the ECB said on Friday.
Conducting a so-called reverse stress test in the new year, the ECB will ask banks to describe what sort of political shock would reduce their Common Equity Tier 1 capital by 300 basis points and its effect on liquidity and funding conditions.
Managing geopolitical risk is among the ECB’s top priorities for the coming years and it is looking to identify bank-specific vulnerabilities and challenge lenders’ assumptions about risk exposure.
“The exercise will assess the extent to which banks’ stress-testing capabilities take geopolitical risks into account,” the ECB said in a statement.
“In this regard, the exercise will aim to foster banks’ own risk-management capabilities, particularly in reverse stress testing, and their ability to design relevant and prudent capital and recovery plans.”
Results of the test will be announced in the summer of 2026.
While the outcome should not affect capital requirements, any weakness revealed will feed into the ECB’s Supervisory Review and Evaluation Process, which is used to tell banks how much capital they need to hold in addition to the regulatory minimum.
(Reporting by Balazs KoranyiEditing by David Goodman)
