EU Banks Seen Resilient to Trade-Driven Recession Shock

The European Banking Authority published stress test results which show European banks can handle a severe global economic downturn stemming from rising trade tensions and geopolitical instability.
The European Banking Authority tested 64 major EU lenders including 51 eurozone banks through a severe recession simulation for 2025–2027 and found no institution would fail to meet minimum core capital requirements. The leverage ratio of one bank was the only exception which demonstrated widespread stability in the sector.
The adverse scenario included U.S. tariffs, Middle East instability, and protectionist trade policies. The simulation predicted EU GDP would decrease by 6.3% throughout the three-year period while banking sector losses would reach €547 billion surpassing the €496 billion projection from the previous year.
The U.S.-owned European subsidiaries experienced more significant losses but stayed within the regulatory capital requirements. The most affected banks operated from Ireland as well as France and Germany and Belgium and Denmark.
The stress scenario would reduce the collective core capital ratio of the group to 12.1% from 15.8% while the baseline ratio stood at 15.8%. The EBA instructed banks to maintain their capital buffers because the current trade war is already causing consumption declines and supply chain disruptions.
The adverse outcomes at 17 institutions would necessitate short-term restrictions on bonus payments and dividend distributions. Banks have made major progress since the 2008 crisis yet regulators warn them to stay alert because worldwide trade tensions continue to rise.