2026 ECB Geopolitical Stress Test results

On 31 July, the European Central Bank (ECB) published the results of its 2026 thematic stress test. The ECB conducts thematic stress tests on banks under its supervision in the ‘off years’ between the biennial EU-wide stress tests done by the European Banking Authority (EBA). Thematic stress tests focus on a particular issue or risk: for the 2026 exercise, the ECB selected geopolitical risk. This follows repeated warnings from the ECB that heightened geopolitical tensions have contributed to an increasingly challenging risk environment for European banks.

In a departure from previous stress tests, the ECB set up the 2026 exercise as a ‘reverse stress test’. Rather than specify a scenario and require banks to model its impact on their balance sheets, the ECB instead asked banks to identify plausible geopolitical risk scenarios that would have a material impact on their capital positions, leading to a fall in banks’ CET 1 capital ratio of 300 basis points. Banks were encouraged to follow the ECB’s framework for assessing geopolitical risk to identify transmission channels through which a geopolitical scenario could impact their business and portfolios.

The Integrated Reporting Framework (IReF) is a framework developed by the European Central Bank (ECB) to simplify and harmonise statistical reporting across Europe. It introduces a more granular approach to a significant share of existing reporting requirements.

The objective of IReF is to standardise statistical reporting across euro area banks, reduce the reporting burden, and improve data quality for various stakeholders, including monetary policy authorities and analysts.

BIRD stands for the Banks’ Integrated Reporting Dictionary. This central data dictionary is a key enabler for the implementation of IReF, as it establishes a common vocabulary and enhances data comparability. It helps banks prepare and manage their data consistently and efficiently for IReF and other reporting requirements. While IReF will become mandatory through regulation, BIRD remains available to banks on a voluntary basis.Announcing the results, the ECB found that banks were generally able to produce economically meaningful scenarios that reflected their different vulnerabilities. However, the ECB identified several shortcomings in banks’ scenario analyses, including:

• Granularity and sensitivity: some banks took a ‘rather rudimentary approach’ to modelling the impact of geopolitical events, not taking sufficient account of the varying impact on different sectors or regions;
• Consistency: in some cases, banks’ stress simulations was not clearly connected to their scenario narratives, with the impacts on their most important and geopolitically vulnerable portfolios not fully captured;
• Liquidity: while many banks modelled a ‘reasonable’ impact on their liquidity positions, at several banks the effect was ‘muted’, despite the close connection between solvency and liquidity stress in a crisis;
• Mitigation actions: overall, some banks were over-optimistic in their proposed mitigation plans, for example assuming loan portfolios could be sold at ‘ambitious’ prices even in a stress scenario.

The stress test results will not feed directly into banks’ capital requirements – unlike the EBA stress tests, it will not be used to calibrate banks’ pillar 2 capital guidance (P2G). Instead, the results will inform the regular Supervisory Review and Evaluation Process (SREP), and the ECB will follow up on deficiencies identified as each bank as part of its ongoing supervisory dialogue.

In preparation for the stress test, banks considered a wide range of geopolitical scenarios, including military conflict (e.g. in the Middle East or western Pacific), energy and supply chain shocks, and disruptions to international trade. The choice of scenario largely reflected differences in banks’ business models. In many cases, however, the key transmission channel was energy prices: many banks modelled how a sharp rise in energy costs could feed through into increased business insolvencies and unemployment, resulting in higher rates of default on corporate and/or retail credits. While scenarios were in most cases decided well before the outbreak of hostilities in the Gulf in late February, this focus on energy prices looked prescient in light of the oil and gas price movements that that conflict triggered.

However, given the inherent uncertainty of future geopolitical events, the stress test was not primarily an assessment of what specific scenario a bank chose to model. Rather, the focus was on banks’ general ability to identify the geopolitical risks they could be exposed to, and their capacity to analyse the impact of a plausible adverse scenario on their businesses. In today’s more uncertain geopolitical context, the ECB believes this should be a key part of prudent capital and business planning.

In our experience, this scenario analysis capability varies significantly across banks. Larger firms typically have greater analytical resources, for example in economic or investment research divisions. These units can boast extensive expertise – but this is not always well linked up internally with central risk or strategic planning functions. At smaller banks, meanwhile the analytical capability is often lacking altogether.

One key constraint on banks’ scenario analysis capability is data. To go beyond aggregate statistical correlations and understand in detail which of their counterparties would likely be impacted in different geopolitical scenarios, banks need granular data, including on borrowers’ exposure to different geographies, international trade flows, and/or key commodity prices. This has been clearly illustrated during the recent Middle East conflict, which not only led to spikes in energy prices but also disrupted the supply of materials such as helium, urea and synthetic polymers that were essential inputs for a wide range of industrial and agricultural production. Few banks had sufficient data to model effectively how the shock to these commodities would propagate along supply chains, and which of their borrowers would likely be most affected.

Increased geopolitical risk looks here to stay, and no-one can predict what shocks will come. To navigate this uncertain environment, banks will need to proactively assess their vulnerabilities and invest in the capacity to identify and analyse different scenarios that could emerge. The ECB’s latest stress test – and the supervisory scrutiny that will follow it – are further reminders of this.