Banks throughout the European Union are well-positioned to endure economic shocks stemming from geopolitical and trade conflicts, according to the European Banking Authority (EBA) on Friday. The agency released the results of its latest evaluation of the banking sector’s health.

The EBA assessed 64 banks across Europe, including 51 from the eurozone, to gauge their responses to a potential prolonged recession affecting the EU and other advanced economies. The results showed that none would fall below core capital requirements, with just one bank projected to breach its leverage requirements.

“The findings suggest that the EU banking system is capable of withstanding a severe yet plausible macroeconomic scenario, reflecting the resilience developed by banks in recent years,” the EBA stated, emphasizing the need for lenders to maintain sufficient capital.

Following the 2008 global financial crisis, which necessitated expensive state bailouts, European and U.S. banking authorities implemented formal stress tests to ensure financial stability.

The EBA noted that some aspects of this year’s adverse scenario are already unfolding, citing U.S. trade tariffs and escalating tensions in the Middle East as examples.

Banks representing three-quarters of the total assets in the EU participated in the evaluation, which simulated potential losses by analyzing performance over three years under both baseline and adverse scenarios.

The European Central Bank (ECB) conducted its own stress test on the 51 eurozone banks assessed by the EBA, plus 45 additional smaller banks, confirming the sector’s resilience.

Adverse Scenario

In the adverse scenario, escalating geopolitical tensions and protectionist trade policies are expected to drive energy and commodity prices higher, disrupt supply chains, and dampen consumption and investment. This could result in a cumulative 6.3% contraction in EU economic output from 2025 to 2027.

The EBA projected combined losses of €547 billion for the banks involved, surpassing the €496 billion anticipated in its 2023 stress test.

While some European subsidiaries of major U.S. banks could see significant hits to their capital reserves, all lenders remained able to meet core capital requirements, despite one expected to breach leverage ratios. The specific bank was not identified, though data for each lender was provided.

For 17 banks, the adverse scenario could necessitate limits or adjustments to bonus and dividend payments for at least one of the three years.

In terms of capital reserves—calculated under the current transitional regime, which tightens progressively through 2033—the adverse scenario could lower the aggregate core capital ratio by 3.7 percentage points, bringing it to 12.1% by 2027, down from 15.8%.

Deutsche Bank reported that its core capital ratio under this scenario would be 10.2%, lower than the average but an improvement from 8.1% in the 2023 stress test. Germany’s second-largest bank, Commerzbank, projected a ratio of 10.5% for 2027, while Italy’s largest bank, Intesa Sanpaolo, estimated its ratio at 12%.

EBA data indicated that banks from Ireland, Denmark, France, Germany, and Belgium faced the most significant capital impacts. Specifically, Landesbank Baden-Wuerttemberg and two other German regional banks, along with France’s Credit Agricole and La Banque Postale, experienced the largest capital depletion effects.

Though there is no formal pass/fail threshold in the EU-wide stress test, its outcomes contribute to the annual risk assessments conducted by supervisors, influencing bank-specific capital requirements and guidance known as “Pillar 2.”