As announced yesterday (20.01.2025) the ECB will examine the strengths of the 51 largest credit institutions under its supervision (through the Single Supervisory Mechanism, Single Supervisory Mechanism SSM). At the same time, the same tests will be submitted by the ECB and 45 smaller banks in order to control their capital strengths. CORVERSE The results of the stress tests will be published in early August 2025. The European Banking Authority will publish detailed results for the 64 banks participating in the exercise at EU level. The adverse scenario of this year’s tests is based on a hypothetical severe escalation of geopolitical tensions, accompanied by increasingly introverted trade policies at global level, which cause increased energy and commodity prices, supply chain disturbances and adverse effects on private consumption and investment combined with global economic shrinkage. More specifically, the deterioration in the economic outlook is linked to a continuous decline in EU GDP by 6.3% cumulatively, between 2025 and 2027. At the end of the period, unemployment in the EU is projected to exceed 6.1% of its basic level. Inflation, according to this scenario, is ejected to 5.0% and 3.5% respectively in 2025 and 2026, to retreat to 1.9% in 2027. CORVERSE The tests to be carried out this year differ methodologically from those carried out by the ECB in the past. In particular, in the previous stress tests, some banks submitted projections that were too optimistic, i.e. did not fully reflect the impact of the adverse scenario on the stress test, given the specific risk profiles of those banks. Therefore, during the 2025 exercise, the ECB will strengthen the control of banks whose forecasts will be considered too optimistic. Banks showing this behaviour will face even more ‘hard control’ throughout the quality assurance tests and may accept ECB steps for on-the-spot checks. On the basis of the data to be collected during these visits and the overall outcome of quality assurance, certain banks may be subject to on-the-spot inspections after the completion of the stress tests in order to identify structural weaknesses in the context of stress tests and adopt the necessary improvements. Banks that repeatedly fail to restore issues within their stress tests could eventually face other measures in the context of a process of escalation in subsequent exercises. As in previous years, the 2025 stress test is not an exercise of “success or failure”. On the contrary, the exercise provides key elements for the assessment process of each bank. In practice, this means that the results of stress tests (especially on the part of capital reduction) will be used as a reference point for determining the Second Pillar (Pillar 2). Furthermore, for the 2025 stress test, the ECB will conduct a scenario analysis on counterparty credit risk for selected banks. This will allow supervisory authorities to assess how well banks can model this risk in market pressure conditions and assess how vulnerable banks are due to the interconnections with non-bank financial intermediaries. Source: RES-AE
ESF: In drawing stress tests for banks
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in Enterprise