ECB publishes results of 2026 geopolitical risk reverse stress test

The European Central Bank (ECB) has published the results of its 2026 thematic reverse stress test on geopolitical risks which involved 110 directly supervised banks in the euro area. The exercise, which forms part of the ECB's supervisory priorities for 2026-28, aimed to strengthen banks' risk management and stress-testing capabilities in light of heightened geopolitical risks. Banks were required to design severe but plausible geopolitical scenarios that would result in a 300-basis point depletion of their Common Equity Tier 1 (CET1) ratio. Unlike traditional stress tests, which apply a common scenario across all firms, the exercise required each bank to develop a scenario tailored to its own risk profile.

The ECB found that most banks were able to produce meaningful reverse stress test simulations. However, it identified several areas for improvement in banks' Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process stress-testing frameworks, including:

• Granularity and scenario sensitivity: ICAAP frameworks need to have an appropriate level of granularity in the risk assessment, and should better capture vulnerable sectors, relevant risk events and emerging risks.
• Importance of multiple scenarios: the exercise confirmed the importance of banks considering a broader range of scenario outcomes when assessing resilience.
• Consistency between scenario narrative and transmission channels: some banks did not adequately link stress scenarios to their most important and geopolitically vulnerable portfolios in the exercise—the ECB emphasises the importance of clearly translating shocks into solvency and liquidity positions, as well as operational resilience.
• Dynamic balance sheet projections: some banks appeared overly optimistic in their assumptions regarding balance sheet expansions in geopolitical stress scenarios.
• Realism of mitigating actions: banks should have well-articulated and prepared but also realistic action plans to mitigate and guard against the effects of negative geopolitical shocks.
• Solvency-liquidity nexus: many frameworks did not adequately capture the relationship between solvency and liquidity stress.

The ECB states that the results will inform ongoing supervisory dialogue and qualitative assessments under the Supervisory Review and Evaluation Process and could therefore affect Pillar 2 requirements, but will not result in changes to banks' Pillar 2 guidance (P2G) or the leverage ratio P2G.

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