EuroWire, BRUSSELS, March 19, 2026: The European Central Bank (ECB) has urged euro area banks to strengthen their preparedness for geopolitical shocks, asking lenders to carry out internal stress tests and set out concrete steps to protect their capital positions against conflicts and trade tensions. Claudia Buch, chair of the ECB’s Supervisory Board, told the European Parliament that resilience should not be assumed even as banks report solid capital levels and stable asset quality.
Buch said supervisors want banks to identify geopolitical risk events that could reduce Common Equity Tier 1 (CET1) capital by at least 300 basis points and to specify what preventive measures they would take to limit the impact. The approach is intended to give supervisors a clearer view of how individual institutions assess and manage their own exposure to geopolitical threats, rather than relying only on a single, standardised scenario.
Euro area banks are entering a period of “rising geopolitical uncertainty” from a position of relative strength, Buch said. She cited an aggregate CET1 ratio of around 16% among significant institutions and said the share of non-performing loans has remained stable at around 2%. However, she cautioned that vulnerabilities persist and could become more visible if geopolitical and economic strains filter through to borrowers and asset prices with a delay. Buch pointed to commercial real estate exposures and lending to small and medium-sized enterprises as areas where risks warrant close attention. She said supervisors remain alert to sector-specific weaknesses that can emerge even when headline indicators such as capital ratios and non-performing loan levels appear steady.
The ECB’s shift in emphasis follows last year’s EU-wide stress test, which applied a common downturn scenario linked to geopolitical frictions and protectionist measures. Buch said the new, bank-driven exercise is designed to show how each lender evaluates its own vulnerabilities and tail risks, enabling supervisors to compare internal assumptions, risk identification and planned mitigants across institutions.
Why the ECB is shifting to bank-led scenarios in 2026
Supervisors also flagged a separate concern: that banks could face pressure to weaken lending standards as competition intensifies while credit losses remain comparatively contained. Buch said supervisors will examine underwriting standards more closely to determine whether loan terms continue to reflect underlying risks. She added that there is no clear evidence of widespread deterioration, but noted that available data is incomplete, making it harder for banks to benchmark their lending conditions against the broader market.
Alongside tougher expectations on risk identification and underwriting discipline, Buch said the ECB is streamlining elements of its supervisory work to focus more heavily on material threats to resilience. She said additional supervisory reporting collected each year as part of individual bank assessments has been reduced by about 20%, part of an effort to reduce burdens where possible while maintaining scrutiny of key risks.
Buch said the ECB is also standardising supervisory processes including capital decisions, internal model approvals, fit-and-proper assessments and onsite inspections. The goal, she said, is to speed up lower-risk cases and devote more attention to complex situations and potentially systemic issues that require deeper supervisory engagement.
Managing third-party and cloud concentration risk
Operational resilience featured prominently in the ECB’s message. Buch said banks’ solid profitability gives them an opportunity to invest in information technology, digitalisation and controls at a time when the sector faces more frequent cyberattacks, wider use of artificial intelligence and greater dependence on outsourced critical services. She argued that strengthening operational capabilities is increasingly central to maintaining resilience, competitiveness and customer trust.
Buch reiterated that full implementation of Basel III should remain a policy priority and renewed calls for deeper European market integration. She also repeated long-standing appeals for progress on a common deposit protection framework and for a stronger liquidity backstop for banks in resolution, positioning these measures as part of a broader effort to reinforce stability in the banking system.
For the ECB, the message to lenders was that current buffers provide time and space, but not immunity. With geopolitical uncertainty rising, supervisors want banks to test resilience more directly, tighten internal preparedness and ensure that capital, underwriting and operational safeguards remain aligned with a more volatile risk landscape.