European banks have demonstrated robust resilience against a potential severe economic downturn triggered by escalating global trade and geopolitical tensions, according to the latest comprehensive stress test conducted by the European Banking Authority (EBA). This critical assessment highlights the sector’s ability to absorb significant financial shocks, providing reassurance amid an increasingly volatile international landscape.

The rigorous health check, involving 64 prominent European financial institutions—including 51 from the Eurozone—simulated a prolonged and challenging recession across the European Union and other major advanced economies. The primary objective was to evaluate how well these banks would maintain their financial integrity under extreme pressure.

Crucially, the stress test results indicated that none of the participating banks were projected to breach their core capital requirements, a testament to their fortified financial stability. Only one institution was found to potentially fall short of its leverage requirement, underscoring the broad strength across the sector.

The implementation of formal, extensive stress tests by European and U.S. banking authorities was a direct response to the global financial crisis of 2008, which necessitated costly state bailouts of numerous banks. The EBA acknowledged that certain elements of the current adverse scenario, such as increasing trade tariffs and heightened tensions in specific regions, have already begun to manifest, adding a layer of contemporary relevance to the findings.

Further reinforcing these positive outcomes, the European Central Bank (ECB) conducted its own parallel stress test, encompassing the 51 Eurozone lenders assessed by the EBA along with an additional 45 smaller banks. The ECB’s findings independently confirmed the banking sector’s enduring resilience, aligning with the broader EBA conclusions.

The adverse scenario modeled in the test depicted a grim economic outlook: worsening geopolitical tensions and protectionist trade policies leading to a significant surge in energy and commodity prices. This hypothetical environment would severely disrupt global supply chains and negatively impact both consumption and investment, collectively driving a substantial 6.3% cumulative contraction in EU economic output between 2025 and 2027.

Under this severe economic model, the sampled banks were projected to incur combined losses amounting to 547 billion euros. While a substantial figure, it represents a higher projection than the 496 billion euros anticipated in the EBA’s previous stress test conducted in 2023, reflecting a more stringent and realistic assessment of potential future risks.

Illustrative of individual bank performance within the stress test, Deutsche Bank reported that its core capital ratio under the adverse scenario for the final year would be 10.2%. Although this figure is slightly below the overall average for tested institutions, it signifies a notable improvement from its 8.1% ratio in the 2023 stress test, indicating enhanced preparedness.