The latest 2025 EU-wide EBA stress test results are out, and our first-glance analysis is in. 

Key Takeaways:

1.    Capital depletion results show an improvement across the EU

• Impact of 2025 ECB Stress Tests shows average capital depletion (2024 CET1 to adverse) of -304bps, 155ps lower than depletion observed in 2023 Stress Tests (459bps).
• Lower depletion explained by similar severity of scenario and improved levels of starting point net interest income, profitability and credit risk
• Depletion of -304 bps in Europe compares to -180bps and -340bps in US and UK latest stress tests, respectively.
• As expected, ECB Stress Test results do not generate any surprises and demonstrate strong capital resilience of the banking sector.

2.   Insights gained for Basel IV impact across the industry

• Stress test 2025 introduces a CRR3 restatement in CET1 starting point (first consistent disclosures of Basel IV impact).
• Total impact (fully loaded) of CRR3 of -129bps across all European banks and of -182bps for European G-SIBs
• RWA inflation impact of -22bps due to operational risk and market risk RWA inflation
• Output floor represents the majority of the impact -110bps or 85% of total 

3.    Banks demonstrate strong resilience to weather a stress due to improved NII and NPL starting positions

• No incremental capital needs with no bank falling below the 5.5% old CET1 minimum threshold and only 5 banks falling below 9% CET1 fully loaded basis
•  Capital flexibility (measured as the buffer between CET1 post stress test and minimum threshold of 5.5%) increases to +584bps from +488bps in 2023.
• Reduced capital demands due to decline of projected P2G by as much as 50bps.
• This compares to a reduction in capital demand of 100bps in latest US stress tests.
• As a result, we expect increases in bank dividends and buybacks from European banks, but not as large as those from US banks favoured by strong deregulation.                                                                  

4.    Countries most impacted are those with least income generation capabilities to offset capital depletion

• Losing countries defined per largest CET1 depletion are Ireland, Denmark and France.
• Winning countries defined per lowest CET1 depletion are Poland, Norway and Portugal.

5.    Stress tests going forward

• Banks continue to be disappointed with the current dynamics of the stress test exercise. The ECB has a pre-established view of each individual bank’s capital depletion and drives quality assurance to deliver on expected stress test outcomes ignoring bank internal results. Given constrained assumptions no insight is gained for risk management purposes.
• Going forward, ECB will run a reverse stress test for geopolitical risks as part of the ICAAP 2026.
• The debate will be centered on US and UK deregulation where we expect significant reduction of capital requirements. European regulators are not keen to reduce capital but rather focus on supervisory simplification. Upcoming deregulation waves will drive substantial change in global banking competitive dynamics.   

Read our full report to learn more about:

• Capital Stress Test Impacts
• Potential for Capital Distribution – Dividend & Buybacks
• Stress Testing Going Forward

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