The European Banking Authority said on Monday it would assess how European banks would react to rising geopolitical tensions and trade wars in the industry’s upcoming health checks.
The simulation, which assumes a dramatic hit to the European economy from geopolitical and trade shocks, begins just as Donald Trump is inaugurated as US president and prepares to review trade relations with key partners.
In launching the latest round of “stress tests”, which will cover 64 banks accounting for three-quarters of banking assets in the European Union and Norway, the EBA said it would publish the results of the checks in early August.
Of the 64 banks, 51 of them come from countries whose banking sector is supervised by the European Central Bank. In parallel, the ECB will conduct its own stress tests on a group of banks not covered by the EBA.
The EBA said it would test banks’ resilience to a worst-case scenario in which geopolitical shocks lead to a cumulative contraction of 6.3% in real gross domestic product across the EU in the three years to 2027.
In this scenario, supply shocks associated with trade tensions are seen pushing inflation sharply higher, before damage to confidence, employment levels and consumer spending rein in the pace of price increases.
The test banks, which on Monday had received all the necessary documents and templates, will provide their final answers in early July, with an intermediate submission deadline before then.
The EBA last published stress test results in 2023, roughly a decade after it began an in-depth examination of the bloc’s lenders, before the ECB took on the role of sole banking watchdog in 2014.
The test is a tool banking supervisors use to assess how much capital lenders need to absorb potential losses and support the economy in a crisis situation.
Their results are fed into the monitoring process.
Source: Reuters
