EU Banks Show Resilience in EBA’s 2025 Stress Test Despite Harsh Economic Scenario

Key Takeaways

• Capital Hit, But Still Standing: EU banks saw a 370 bps capital depletion under stress, ending with a 12% CET1 ratio.
• €547 Billion in Hypothetical Losses: Credit, market, and operational risks hit hard but income generation helped cushion the blow.
• Sectors in Focus: Trade-intensive industries and commercial real estate showed the most vulnerability.
• Regulatory Enhancements: CRR3 rules were factored in, and new centralized modeling helped standardize projections.
• More Transparency Ahead: The EBA will release another round of bank data in December 2025, expanding insight into over 120 institutions.

Deep Dive

On August 1, the European Banking Authority (EBA) dropped the results of its 2025 EU-wide stress test, a formidable what-if scenario designed to see how banks would hold up if the global economy went sideways. And not just a little sideways. We’re talking trade wars, inflationary flare-ups, crashing asset prices, and real estate meltdowns, the financial equivalent of a perfect storm.

But even after absorbing €547 billion in simulated losses, Europe’s banks proved surprisingly resilient. Their aggregate CET1 capital ratio (a key measure of financial strength) only fell 370 basis points, ending at a solid 12%. Not bad, considering the scenario assumed a 6.3% GDP plunge, a stock market nosedive, and property prices going through the floor.

“Reassuring” is how the EBA put it. And for once, that doesn’t feel like spin.

Crisis Mode, Simulated

The EBA’s stress test isn’t a forecast. It’s a controlled panic, a way to ask, "What happens if things really go wrong?"

This year’s scenario imagined a world buckling under geopolitical tensions, supply shocks, and fractured trade systems. EU unemployment spikes. Interest rates rise and then invert. Inflation flares, then vanishes. Stock markets fall by half. And housing? Residential real estate drops 15.7%. Commercial real estate crashes nearly 30%.

All told, it’s a cocktail designed to test every weak point in a bank’s balance sheet. And this time, it hit hardest in credit risk and market exposures. Trade-heavy sectors like manufacturing and transportation, along with commercial real estate portfolios, took the biggest hits. But banks held the line thanks in large part to strong income-generating capacity, which cushioned the capital blow.

A Stronger Starting Point

One reason the sector fared better than in the last exercise? Banks were in better shape to begin with.

They entered 2025 with higher profits, stronger capital buffers, and healthier margins, the result of several years of economic tailwinds and post-pandemic stabilization. That meant more room to absorb losses when the hypothetical storm rolled in.

Compared to 2023, the capital hit was lighter (370 bps vs. 479 bps), even though the headline losses were bigger in nominal terms. That’s because banks have become more risk-sensitive, yes, but also more resilient.

Still, the test wasn’t without warning signs. The EBA flagged that banks need to up their game when it comes to modeling credit losses by sector. Too many still rely on broad assumptions that gloss over the real vulnerabilities hiding in their loan books. Agriculture, transport, mining, and wholesale trade were among the most exposed.

Real Estate is Still a Red Flag

As with previous years, commercial real estate once again showed its teeth. Under the adverse scenario, the share of troubled loans (stage 3) in this category tripled from 4% to nearly 13%. Even “performing” loans started to wobble, with nearly a quarter reclassified as high-risk by the end of the test.

Not all banks are equally exposed, of course. But those with heavier real estate portfolios saw some of the most severe credit risk impacts, a vulnerability that supervisors will no doubt be revisiting during the upcoming review process.

What’s New in 2025

The EBA made some notable tweaks this year. Chief among them: a more centralized approach to projecting net interest income (NII). Instead of letting each bank model their own assumptions, the EBA rolled out a standardized formula. The goal? Better comparability, fewer outliers, and less wiggle room for wishful thinking.

The test also incorporated transitional measures from the EU’s updated Capital Requirements Regulation (CRR3), now in effect. That means banks had to recalculate starting capital levels based on tougher new rules, giving supervisors a better sense of how institutions will handle the gradual phase-in of regulatory reforms through 2033.

Interestingly, climate risk wasn’t part of the 2025 exercise. But that’s changing. The EBA has flagged that climate scenarios will begin showing up in stress tests starting in 2027, a major shift as regulators start weaving sustainability into core prudential oversight.

Transparency and What Comes Next

As always, the EBA didn’t just test, it disclosed. Bank-by-bank results are available online, complete with interactive dashboards and downloadable data sets for the more curious (or masochistic) observers.

Importantly, the stress test isn’t a pass/fail exam. Instead, it feeds directly into the Supervisory Review and Evaluation Process (SREP), giving regulators the ammunition they need to assess capital adequacy and, where necessary, push for stronger buffers or revised distribution plans.

And for those wondering about banks that didn’t make the 64-institution sample? More insights are on the way. The EBA plans to publish a broader transparency exercise in December 2025 covering over 120 EU banks, just in time for supervisors to get a fuller picture of sector-wide vulnerabilities heading into 2026.

This year’s stress test proves what many in the sector have hoped but weren’t entirely sure of: Europe’s banks can take a punch. Even a big one.

But it also shows that risks remain unevenly distributed, that some portfolios, like real estate and trade-sensitive sectors, are still pressure points, and that modeling assumptions are only as useful as the effort behind them.

Still, in an age where crises come faster than central banks can draft meeting minutes, resilience matters. And in 2025, at least on paper, EU banks have it.

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