2025 EBA Stress Test

Geopolitical and Trade Risks Shape the Adverse Scenario

According to a commentary by Morningstar DBRS, the 2025 adverse scenario of The 2025 European Banking Authority (EBA) stress test incorporates heightened geopolitical tensions, supply chain disruptions, and trade shocks, which pose significant challenges to financial institutions. Despite these uncertainties, European banks enter the stress test in a relatively stronger position than in previous years due to improved financial fundamentals.

On January 20, 2025, the EBA initiated its latest European Union (EU)-wide stress test, designed to assess the ability of banks to withstand economic downturns between 2025 and 2027. The findings, expected to be published in August 2025, will provide insight into the sector's robustness.

While the severity of the adverse scenario remains comparable to the 2023 stress test in terms of GDP contraction and unemployment increases, the primary risks this time stem from global geopolitical instability and trade-related disruptions.

Key Stress Test Assumptions

The adverse scenario for the 2025 stress test integrates a range of economic challenges, including:

• Geopolitical Tensions: Escalation of global conflicts, leading to heightened market volatility and investor uncertainty.

• Trade Disruptions: Major shocks to international trade, resulting in supply chain bottlenecks and inflationary pressures.

• Macroeconomic Decline: A projected cumulative GDP contraction of 6.3% across the EU, deeper than the previous stress test.

• Real Estate Depreciation: Declines in commercial and residential real estate prices, affecting banks’ asset portfolios.

• Stock Market Volatility: Significant drops in equity values, further straining financial markets.

Comparisons with the 2023 Stress Test

While the overall severity of the 2025 adverse scenario is high, it differs from the 2023 exercise in key aspects. The previous stress test focused more on inflationary pressures and sharp interest rate increases, whereas the current test incorporates a more moderate rise in inflation (peaking at 5.0% in 2025) and subdued interest rate hikes. Additionally, banks are now required to adhere to updated Basel 3.1 (CRR3) capital requirements, influencing their capital adequacy evaluations.

Banking Sector Resilience

Morningstar DBRS notes that European banks are generally better positioned than in previous exercises, thanks to higher capital buffers and improved financial performance. However, banks with significant exposure to vulnerable sectors, such as commercial real estate, oil and gas, or manufacturing, may face greater risks. Institutions with strong geographical diversification are likely to exhibit greater resilience in mitigating localized economic downturns.

Conclusion

The 2025 EBA stress test serves as a critical benchmark for assessing the robustness of European banks amid rising geopolitical and trade-related risks. While the industry enters the test with stronger fundamentals than in past years, the unpredictable nature of global economic developments makes it difficult to anticipate final outcomes. The results, due in August 2025, will provide valuable insights into how banks may navigate these evolving challenges and maintain financial stability.

Entering Italian NPE Market is a Newsletter and a Linkedin Group focused on News, Updates, and Insights on Italian Banks, Distressed Credit Markets, Fintech, and Real Estate.

Relevant Links:

https://dbrs.morningstar.com/research/446587/2025-eba-stress-test-geopolitical-and-trade-risks-pressure-adverse-scenario

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