The euro area’s banking sector remains capable of enduring even under tougher economic conditions. This was revealed by the latest stress test conducted by the European Banking Authority (EBA) in cooperation with the European Central Bank (ECB). German institutions, too, proved resilient in the face of this year’s particularly challenging adverse scenario. Their sound capital base helped them successfully absorb the losses simulated in the stress test. German banks prove stable overall, even in a significantly tougher economic setting such as that of the stress test, says Nikolas Speer, Chief Executive Director of Banking Supervision at the Federal Supervisory Authority BaFin. Michael Theurer, member of the Executive Board of the Deutsche Bundesbank, notes: Given the uncertainties in the markets at present, it is gratifying that institutions are well equipped overall. But it remains key for supervisors to keep a constant and attentive eye on how things are developing going forwards. 

A total of 96 euro area banks (including 21 German institutions) and 13 institutions outside the euro area took part in the stress testing exercise. The group consisted of 51 of the euro area’s largest banks (including 12 German ones), which were examined as part of the EBA-coordinated stress test, and 45 medium-sized institutions under the direct supervision of the ECB (nine of which are German), which underwent the ECB’s own stress-testing. Together, the participating banks account for just over four-fifths of all banking assets in the euro area. 

On average, German banks saw their Common Equity Tier 1 (CET1) ratio decline more strongly under the adverse scenario than other institutions in Europe. Nevertheless, German institutions’ capital ratios at the end of the exercise stood higher than the euro area average (when looked at from the relevant “transitional” perspective). This was primarily because German institutions started out with above-average capitalisation before the stress test began. Other reasons for their overall solid performance in the stress test include improved profitability (especially in respect of net interest income) and the predominantly stable quality of banks’ assets. Effects born of past crises – such as the coronavirus pandemic and the energy crisis – as well as potential repercussions stemming from geopolitical tensions have had barely any negative impact on the balance sheets of most banks so far. 

Stress test scenario: severe crisis and economic slump with high inflation

Each of the stress tests consisted of a baseline scenario and an adverse scenario. Both scenarios are based, amongst other things, on assumptions regarding developments in gross domestic product (GDP), inflation, unemployment and capital market interest rates. Looking at a three-year horizon, the baseline scenario reflects a set of economic developments considered likely as of December 2024. The hypothetical adverse scenario considers a trajectory characterised by geopolitical tensions, high inflation, rising interest rates and a significant decline in real GDP. In Germany’s case, GDP is assumed to fall by 7.5 % over the course of the next three years. For the euro area, there is a simulated decline of 6.2 % over the same period. Banks had to simulate how this adverse scenario would impact their profitability and risk situation and, as a result, key supervisory metrics, in particular their CET1 ratio. 

Background and methodology 

The results of this year’s stress test take into account the rules of the revised Capital Requirements Regulation (CRR III), which entered into force on 1 January 2025 and implements the Basel framework at the European level. Banks were asked to calculate their capital ratios for the outset of the exercise (year-end 2024) and the ensuing three-year forecasting horizon covered by the simulation. They had to provide two versions of the figures, reporting the decisive ratios on a transitional basis and on a fully-loaded basis. Transitional ratios take into account the transitional arrangements set out in CRR III for the period covered by the stress test. Fully loaded ratios disregard the transitional provisions and any potential portfolio adjustments by institutions in the years up to the end of the transitional provisions in 2033 and, as such, are hypothetical in nature.

The role of BaFin and the Bundesbank 

The EBA, ECB, European Systemic Risk Board and national supervisory authorities work closely together to organise the stress test, which is run every two years. BaFin and the Bundesbank play a part both in work to refine the methodology and in carrying out the tests. They also assist the ECB in revising the recommendations to banks on how much capital they should maintain (Pillar 2 guidance).