European supervisor stress tests banks for resilience to trade wars

The European Banking Authority’s (EBA) biannual stress test kicked off this week. Last run in 2023, this yearʼs test will see the resilience of European banks tested against a “hypothetical scenario” of worsening geopolitical tensions, with large, negative and persistent trade and confidence shocks.

EBA said the 2025 stress test was designed to test the solvency of European banks and assess if they have sufficient capital levels to absorb the adverse effects of the hypothetical scenario. It will be conducted on a sample of 64 banks, which collectively account for roughly 75% of total banking sector assets in the EU and Norway.

Worst case

The scenario assumes the materialisation of the main financial stability risks identified by the European Systemic Risk Board (ESRB) in the fourth quarter of 2024. It will test banks against a sustained drop in EU GDP by 6.3% cumulatively, in the period 2025-27, with unemployment hitting 6.1% and inflation rising to 5% in 2025 before falling back to 1.9% by 2027.

The banks will be tested not only on their resilience as a whole but also on their exposure to individual business sectors within their lending portfolios.

“The main purpose of the breakdown by sector is to ensure that the results of the stress test reflect banks’ exposures towards different sectors, which are expected to be affected differently by the scenario, thereby increasing the credibility and realism of the exercise,” said the EBA in a Q&A explaining the stress test.

Trump tariffs

Meanwhile, Donald Trump began his second presidential term on Monday by issuing a memo on his “America First trade policy”, in which he instructed the secretary of commerce and the secretary of the Treasury to investigate unfair trade practices adversely affecting US exports. Previously, Trump has said he could impose tariffs of 25% on Canada and Mexico. This could foreshadow possible future geopolitical tensions or trade shocks that EU banks must be prepared for.

The results of the EU-wide stress test will be published in August, the EBA said.