Geopolitical risk is a clear supervisory priority and a cross-cutting risk driver under the ECB’s supervisory priorities for 2026–2028, reflecting its potential to cause sudden and severe disruption across banks’ financial and operational activities.
When the ECB announced the exercise in December 2025, we examined how its reverse stress-test methodology would require banks to identify the geopolitical scenarios capable of materially affecting their capital and liquidity positions. Read our previous article here. On 31 July 2026, the European Central Bank published the results of this geopolitical reverse stress test. The exercise covered 110 directly supervised banks. Each bank had to design a relevant geopolitical scenario leading to a 300-basis point reduction in its CET1 ratio.
For this exercise, banks developed scenarios involving military conflicts, trade and energy disruptions, economic sanctions, macroeconomic confidence shocks, cyber incidents and supply chain disruptions. The ECB found that institutions were generally able to design coherent scenarios reflecting their business models and vulnerabilities. Real economy effects were identified most frequently, followed by financial market impacts, while safety and security concerns played a more prominent role in conflict and cyber-related scenarios.
However, the exercise also identified weaknesses in banks’ stress-testing frameworks.
Some analyses lacked granularity and sensitivity. Some quantitative impacts did not fully reflect the scenario narrative. The ECB also raised concerns about solvency-liquidity interactions and the realism of certain management actions.
The exercise was also designed as a capital-focused reverse stress test, yet several of the ECB's observations extended beyond solvency alone and raised broader questions about recovery capabilities, operational resilience and banks' abilities to respond to severe but evolving disruptions.
It is important to mention that these findings will not lead to adjustments in Pillar 2 Guidance. However, they may inform qualitative assessments under the Supervisory Review and Evaluation Process (SREP) and will be followed up through ongoing supervisory dialogue.
The exercise therefore provides an early indication of what supervisors will now expect banks to improve. This can be considered through three questions:
We explore how these questions shift the focus from testing the scenario itself to assessing how prepared banks really are to respond.
The reverse stress test differed from a traditional capital exercise. The ECB defined the outcome, but not the scenario. Banks had to work backwards and identify the geopolitical events that could produce the required capital depletion.
Beyond capital impacts, the ECB also assessed banks' scenario design capabilities, their understanding of transmission channels and the consistency of their stress-testing frameworks.
Most institutions considered the real economy to be the main transmission channel, while financial market impacts and safety-related concerns played a greater role in conflict and cyber-related scenarios.
The issue is not whether banks can imagine a war, a trade conflict or a cyberattack. It is whether they can understand and quantify how several events may interact across countries, sectors, markets and operational dependencies.
The ECB’s findings on granularity illustrate this challenge. Some banks used basic approaches and did not sufficiently differentiate impacts across regions or sectors. The ECB also found cases where the most significant or geopolitically exposed portfolios were not fully reflected in the quantitative results.
In several cases, scenario narratives and quantified impacts were not fully aligned. According to the ECB, some institutions struggled to translate geopolitical assumptions into sufficiently granular portfolio-level impacts. These findings suggest that the challenge is not only identifying a plausible adverse event, but also demonstrating a robust understanding of how that event would affect specific exposures and business activities.
Stress testing cannot eliminate uncertainty. Its value lies in identifying material vulnerabilities and assessing whether institutions can respond when assumptions prove incomplete.
From a supervisory perspective, banks will need to demonstrate a clear and consistent link between scenario narratives, geopolitically vulnerable exposures, transmission channels and quantified financial and operational impacts. Scenario quality is therefore becoming part of the supervisory assessment of banks’ stress-testing and risk management frameworks.
"The results confirm that geopolitical risk cannot be assessed solely through capital impacts. Banks increasingly need to connect stress testing, recovery planning and operational resilience within a coherent risk management framework.”
Gregory Marchat Partner and Group Financial Services Leader, Forvis Mazars
Banks were required to present mitigating actions, including capital raising, cost reductions, portfolio disposals and adjustments to their business activities. The ECB considered most actions relevant. However, some assumptions were overly optimistic, including asset sales at ambitious prices under adverse market conditions.
The ECB identified recurring weaknesses across participating banks. Some management actions appeared overly optimistic, while assumptions regarding market conditions or asset disposals remained relatively favourable despite the severity of the scenarios. These observations are particularly important because the credibility of recovery actions depends not only on their design but also on their practical executability during periods of market disruption.
A recovery option cannot be considered credible simply because it appears in a plan. The bank must be able to execute it under stressed conditions. Actions that remain feasible during an institution-specific crisis may become difficult to implement during a broader geopolitical disruption.
The ECB also identified weaknesses in the interaction between solvency and liquidity. Several banks reported only limited changes in liquidity metrics despite the capital depletion imposed by the exercise. The ECB considered this could be improved, as solvency and liquidity are directly connected during a crisis.
In a geopolitical crisis, capital, liquidity and operational pressures can quickly reinforce each other, making recovery actions more difficult to execute. Capital losses may weaken confidence and increase funding pressures. Liquidity needs may lead to asset sales, generating further losses. Operational disruption can constrain the bank’s ability to execute its recovery options.
The results also highlight the link between recovery planning and resolvability. Recovery actions are intended to restore the institution before resolution becomes necessary. If they are delayed, ineffective or dependent on unavailable market capacity, the bank may reach its point of non-viability more quickly.
The regulatory consequence is clear. The ECB stated that supervisors would follow up with relevant banks through the ongoing dialogue on capital and recovery planning. It also stressed the role of boards in ensuring that scenario analysis and contingency planning are properly considered.
Supervisors will therefore expect recovery options to be supported by realistic assumptions on timing, valuation, market capacity and operational execution. The issue is no longer only whether an option exists in the recovery plan, but whether the bank can demonstrate that it would remain executable under the scenario considered.
"Geopolitical crises are inherently difficult to predict. The increased supervisory underscores the need for banks to demonstrate preparedness, adaptability and the ability to respond effectively under severe but plausible conditions.”
Eric Cloutier Partner and Group Head of Banking Regulations, Forvis Mazars
One of the most important messages from the ECB is that exploratory scenario analysis should become an increasingly important component of banks’ risk management frameworks. Rather than attempting to forecast a single future state, institutions should assess their resilience across a range of plausible but uncertain geopolitical developments. In that respect, the exercise extends beyond geopolitical risk alone and provides insights into how banks can approach emerging risks characterised by uncertainty, complexity and limited historical evidence.
The ECB found that cyber incidents and disruptions involving third-party providers were the most prominent non-financial threats identified by banks, leading to the need to better ensure operational resilience in their stress testing frameworks, rather than testing capital adequacy alone. For effect, banks must connect financial and non-financial transmission channels, understand their critical dependencies and assess whether essential services and contingency arrangements would remain effective during severe disruption.
The same issue may arise in other areas of supervisory attention. Cyber risk, climate risk, AI-related risk and concentration in critical technology providers share some common features. Historical evidence may be limited, transmission channels may change and financial and operational impacts may occur together. The disruption that eventually materialises may also differ from the scenario initially tested.
Reverse stress testing focuses less on predicting a specific event than on assessing whether governance, controls and recovery capabilities remain effective across a range of severe scenarios. Supervisors will therefore expect stress testing to inform contingency planning and operational preparedness rather than remain a standalone capital exercise.
The ECB’s findings create no direct Pillar 2 Guidance impact. However, this does not mean that the exercise has no prudential consequences. Identified weaknesses may inform qualitative SREP assessments and will be addressed through the ongoing supervisory dialogue, including on capital and recovery planning. The practical implications for banks therefore arise from clearer supervisory expectations in four areas:
These expectations require closer coordination between risk, finance, treasury, operations, recovery planning and senior management. They also require banks to use the exercise as an input to existing frameworks rather than as a standalone regulatory submission
The immediate consequence is not an additional capital requirement. It is greater supervisory scrutiny of how banks identify vulnerabilities, design recovery options and prepare for severe financial and operational disruption.
“The ECB exercise shows that identifying geopolitical vulnerabilities is no longer the main challenge. The more difficult question is whether banks can continue operating, adapt and execute credible recovery actions when reality diverges from the scenario they prepared for."
David Ciolfi Senior Manager, Forvis Mazars UK
The ECB’s exercise shows that banks are becoming better at identifying geopolitical vulnerabilities. However, it does not establish that they can anticipate the next major shock, or that all proposed responses would remain executable during a systemic crisis. The findings on management actions, solvency-liquidity interactions and non-financial risks show that important gaps remain.
Capital provides the capacity to absorb losses. Recovery planning provides options to restore the institution. Operational resilience supports the continuity of critical activities. Supervisors will increasingly expect banks to demonstrate how these elements work together under severe but plausible conditions.
The real test is not if banks can predict the next geopolitical crisis, but if they can continue operating when the crisis that eventually emerges is not the one they prepared for.
Keeping your finger on the pulse of regulatory developments in a changing world.
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