Europe’s Banks Face the Ultimate Test and Pass. What the 2025 EBA Stress Test Tells Us About Financial Resilience

If you have ever wondered what would happen if Europe’s financial system was hit with the economic equivalent of a perfect storm, the European Banking Authority (EBA) has just given us an answer.

In its latest EU-wide stress test, published in mid-2025, the EBA subjected 64 of the continent’s largest banks to an intense simulation. This was a hypothetical three-year economic downturn triggered by a breakdown in global trade, geopolitical instability, rising commodity prices, and a sharp fall in asset values.

The results are reassuring. Despite cumulative losses of €547 billion across the system, the European banking sector proved resilient. Capital buffers stayed well above regulatory thresholds, even in the harshest conditions the EBA has ever modelled. In short, the system bent but did not break.

Let us look more closely at what this stress test actually is, what we have learned from the 2025 results, and what it means for the future of the European banking landscape.

Stress Testing 101: Why These Exercises Matter

A stress test is essentially a financial fire drill. Just as engineers test how buildings withstand earthquakes or manufacturers crash-test cars, banking supervisors pressure-test financial institutions. The EBA designs an extreme but plausible economic scenario and then models how each bank’s capital position, earnings, and losses would evolve over a three-year period.

There is no formal “pass or fail” label. Instead, the results offer insights into each bank’s ability to absorb losses while continuing to support the economy. These stress tests have become a cornerstone of Europe’s financial oversight framework since the global financial crisis. The transparency they provide has helped rebuild trust, discipline risk-taking, and strengthen the system.

The 2025 Scenario: Trade Wars, Market Crashes, and Inflation Comeback

This year’s scenario was no ordinary downturn. It imagined a sharp contraction driven by a resurgence in global trade wars, particularly between the EU and the US, as well as geopolitical tensions that pushed energy and food prices back up. Supply chains unravelled, inflation reaccelerated, and markets collapsed under the weight of uncertainty.

In numbers, EU GDP was assumed to fall by 6.3% over three years. Stock markets were projected to crash by 50% in 2025 alone. Commercial real estate prices plunged by 30%, and residential property declined by around 15%. Interest rates remained elevated, unemployment surged, and financial conditions tightened sharply.

Despite the severity of these assumptions, the average Common Equity Tier 1 (CET1) capital ratio of European banks dropped from 15.8% to 12%. This is still comfortably above regulatory minimums.

So, What Has Changed Since 2023?

Compared to the previous stress test in 2023, the 2025 results tell a clear story of growing resilience. In 2023, the average CET1 ratio dropped by 4.6 percentage points under stress. This year, the decline was just 3.7 points.

That is a meaningful improvement, especially considering that the overall size of projected losses increased from €496 billion in 2023 to €547 billion in 2025.

Two main factors explain this improvement. First, banks entered this test with stronger starting positions. Higher interest rates over the past two years significantly boosted net interest income, fattening margins and improving capital buffers. Second, their profitability during the stress period, while reduced, still acted as a shock absorber. Cumulative net interest income over the three-year stress period remained high, even under adverse conditions.

Real Examples: How Individual Banks Performed

Not all banks experienced the same level of impact. Some notable examples stand out.

BBVA in Spain saw a CET1 drop of just 1.86 percentage points, finishing with a solid 11% ratio. This was one of the lowest depletions among large EU banks.

BNP Paribas in France fared similarly well, with only a 2.35 point drop, down from nearly 4 points in the 2023 test. This performance puts it in the ECB’s top resilience bracket.

Commerzbank in Germany experienced a larger drop of 4.12 points, ending at 9.6%. While lower than some peers, this still exceeded regulatory thresholds and improved slightly over 2023.

Italian banks such as UniCredit and Intesa Sanpaolo stood out at the country level, with average CET1 drops of just 1.5 to 1.8 points. This was thanks to high starting profitability and lower risk exposures.

Where the Cracks Appear: Sectoral and Systemic Risk Exposures

Although the system overall looks strong, the stress test revealed key vulnerabilities.

Commercial real estate was one of the most stressed sectors. Office demand is still adapting to post-pandemic work patterns, and falling valuations pose credit risks for banks heavily exposed to this space.

Energy-intensive industries and sectors reliant on global trade also saw elevated risk. In a scenario where tariffs rise and supply chains splinter, manufacturing, construction, and chemicals all come under pressure.

Another concern flagged by the EBA earlier this year is the growing U.S. dollar funding gap in parts of the system. Around a quarter of EU banks do not have sufficient USD funding to match their dollar-denominated assets. In a real-world crisis, especially one where dollar swap lines are politically strained, this mismatch could become a critical vulnerability.

Regulatory Implications: Capital Planning and Supervision

The results of the stress test will directly feed into the ECB’s annual Supervisory Review and Evaluation Process (SREP). Banks that showed resilience may be rewarded with lighter Pillar 2 Guidance, allowing more flexibility in capital management. Those that struggled could face restrictions on dividends or be required to hold additional capital buffers.

For example, BNP Paribas indicated that its strong showing could lower its Pillar 2 Guidance range, which may support future dividend plans.

More broadly, the results reaffirm that Europe’s regulatory reforms over the past 15 years are working. Higher capital requirements, better internal modelling, and tougher governance have left banks better prepared for shocks, whether economic, political, or financial.

The Bigger Picture: Confidence in a Time of Uncertainty

For investors, policymakers, and the public, the 2025 stress test offers reassurance. It shows that Europe’s banks can withstand a shock even worse than the global financial crisis without widespread failures or government bailouts.

That confidence matters. In recent years, events such as the collapse of U.S. regional banks and market volatility have stirred global nerves. Europe’s transparency, coupled with robust capital positions, sends a clear message that the system is strong, stable, and prepared.

However, this is not the time to become complacent. Risks are always evolving. The next EBA stress test could very well model climate risks, cyber threats, or technological disruptions. Banks and supervisors will need to stay agile and continue to adapt.

Final Thoughts: What the 2025 Stress Test Really Tells Us

If the 2025 EBA stress test was a storm drill, the ship stayed upright. The system absorbed massive simulated shocks and emerged intact. This is not just a technical achievement. It is a signal that the European banking sector has matured into a safer, more resilient part of the economy.

Like any good drill, the point is not simply to celebrate. It is to identify the next steps, whether that is strengthening funding structures, reducing risky exposures, or improving internal models for sector-specific risk.

The takeaway is simple. Europe’s banks are ready for rough seas. Now the job is to stay ready for whatever comes next.

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