The European Central Bank (ECB) stated that banks in the eurozone are entering a period marked by an unprecedented rise in shock risks, emphasizing the need for them to prepare for disruptions that could have widespread effects on financial systems in the coming years. This announcement was made as part of the ECB’s declaration of its new supervisory priorities, reflecting a financial reality that is increasingly complex and diverse in terms of risk sources from geopolitical tensions to cyberattacks and changing trade policies. The bank noted that the nature of these risks requires higher preparedness, advanced technological infrastructure, proactive management, and stricter supervision to ensure banks can handle various potential scenarios.
The ECB highlighted that climate, demographic, and technological crises contribute to increased financial system fragility and raise the likelihood of severe events, even if their probability remains low. Therefore, strengthening banks’ resilience to political risks and uncertainty will remain a key priority, focusing on prudent risk management and maintaining adequate capital levels. In this context, the bank plans to conduct a reverse stress test to determine the level of capital depletion, with each financial institution defining the scenario that could trigger this depletion.
Despite these challenges, the ECB affirmed that European banks remain in a strong position, demonstrating resilience and good profitability, with stable asset quality supported by steady economic growth and relatively balanced inflation. Consequently, overall capital requirements will remain unchanged, with a slight easing in the non binding guidance buffer, while the CET1 capital ratio for 2026 will remain at 11.2%.
However, the bank warned that the current supportive environment may not last long, given ongoing negative risks from U.S. EU trade tensions and broader geopolitical risks, which could impact key export dependent sectors such as automotive, chemicals, and pharmaceuticals, potentially affecting asset quality. It also cautioned that financial markets remain vulnerable to sudden corrections, as political risks may not yet be fully reflected in asset prices, leading to overvaluations. As part of its efforts to mitigate future risks, the ECB will continue to enforce conservative lending policies and sound credit underwriting standards to limit the accumulation of non performing loans.
Stay informed about global markets through our previous analyses. and Now, you can also benefit from LDN company services via the LDN Global Markets trading platform.
