“Europe’s banks operate in a challenging environment. Maintaining their resilience and ability to support the real economy requires a strong institutional framework and forward-looking risk assessments,” stated Claudia Buch, the Chair of the ECB’s Supervisory Board.
Speaking at a hearing before the Economic and Monetary Affairs Committee of the European Parliament in Brussels, Buch highlighted the recent stress tests on the euro area’s banking system. She noted that, in the face of an adverse macroeconomic shock, European banks would have “a better ability to absorb those losses compared to the previous 2023 stress test.”
Buch indicated that under assumptions of escalating geopolitical and trade tensions with higher tariffs – leading to increased uncertainty, lower market confidence, and decreased growth – the non-performing loan ratio “would rise to 5.8%, reaching levels last seen in 2014.”
“Currently, non-performing loans are about 2%. Aggregate losses would amount to 628 billion euros, representing 80 billion euros more, or 14% higher than the previous stress test,” she exemplified.
Buch urged vigilance: “We are watchful and expect banks to exercise the same prudence.”
The primary reasons for current geopolitical and trade tensions include the rivalry between major powers – the United States and China –, armed conflicts in Ukraine and the Middle East, disputes over strategic resources and critical technologies, and the fragmentation of global value chains.
Currently, the EU is reforming its crisis management and deposit guarantee framework to strengthen depositor protection and reduce the need for taxpayer-funded bailouts.
Buch argued that “resolution tools for a broader range of banks and ensuring sufficient financing for banks undergoing resolution will enhance financial stability, protect depositors, and reduce reliance on public funds.”
“Overall, a more credible crisis management framework makes potential crises less likely and less costly,” she noted.
Buch emphasized the need for the EU to “better prepare for future crises.”
“The current challenges demand more Europe, not less: harmonizing national rules would significantly improve integration, strengthen competition, and increase efficiency,” she outlined, adding that “weakening standards […] would jeopardize confidence in European banks and diminish their ability to respond to challenges.”
The stress test mentioned during the hearing covered 96 euro area banks (51 large and 45 medium-sized) under the direct supervision of the ECB.
The test revealed strong profitability, providing banks with a solid buffer against studied losses, albeit acknowledging potential impacts due to “high geopolitical tensions.”
