Euro Area: Publication of Financial Sector Assessment Program Documentation-Technical Note on Stress Testing the Banking Sector

International Monetary Fund

No 2025/210, IMF Staff Country Reports from International Monetary Fund

Abstract: This Technical Note focuses on the euro area banking sector, which has weathered a succession of shocks over the past few years with notable resilience. The assessment examined how banks would respond to two severe stress scenarios with a three-year horizon—one centered on an escalation of geopolitical tensions and another simulating a deep and widespread recession. While both scenarios revealed that adverse macroeconomic shocks can materially erode banks’ capital buffers only a few banks would breach regulatory capital requirements. The primary source of capital depletion is the deterioration in credit quality. As economic conditions worsen, a substantial share of loans migrate into higher-risk categories, triggering elevated provisioning needs. The analysis highlights important differences across business models. Liquidity stress tests reveal that banks can withstand liquidity outflows under severe scenarios, while some banks have material exposure to US dollar liquidity risk. Banks’ exposures to contingent liquidity risks have increased materially since the 2018 financial sector assessment program and require continued monitoring and analysis. The analysis highlights the importance of granular monitoring of balance sheet items in relation to their sensitivity to solvency and liquidity risk, particularly when correlations break under stress.

Keywords: cash flow liquidity stress tests; I. solvency stress test Results; solvency-liquidity interaction; net fee; household vulnerability assessment; Stress testing; Liquidity; Liquidity requirements; Liquidity risk; Credit; Global; Europe (search for similar items in EconPapers)
Pages: 138
Date: 2025-07-25
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