2025 EBA Stress Test: Geopolitical and Trade Risks Pressure Adverse Scenario

This commentary discusses the main scenario assumptions of the European Banking Authority's (EBA) 2025 EU-wide stress test. The EBA will announce the results in early August.

Key highlights include:
-- The severity of the adverse scenario is high, but it is similar to that of the 2023 stress test in terms of cumulative GDP contraction and rise in unemployment levels, albeit for different reasons.
-- The 2025 stress test adverse scenario focuses on increasing geopolitical tensions and the escalation of conflicts whilst incorporating major shocks to trade and significant disruptions to supply chains.
-- However, the 2025 adverse scenario assumptions include a more moderate rise in inflation and interest rates than the previous exercise.

"The starting point position of European banks in the 2025 stress test is generally better than in previous exercises, as most European banks have improved fundamentals and are in a better financial position to cope with adverse economic conditions", said Maria Rivas, Senior Vice President, Sector Lead, European Financial Institution Ratings at Morningstar DBRS. "However, the severity of the assumptions related to the escalation of geopolitical conflicts makes it challenging to anticipate any results compared with previous stress tests, and as a result, there could be some unexpected findings."