ECB to test banks' resilience to political risk amid war, tariffs

By Francesco Canepa and Jesús Aguado

FRANKFURT/MADRID (Reuters) -The European Central Bank will test banks' resilience to geopolitical turmoil next year, chief ECB supervisor Claudia Buch said on Tuesday, as part of a growing focus on risks, from tariffs to sanctions.

The ECB has long warned that geopolitics is one of the biggest risks for euro zone banks amid conflicts in Ukraine and Gaza, as well as the trade war stoked by U.S. President Donald Trump. It will now assess banks' preparedness to that type of risk, but with a twist.

In typical stress tests, banks are given scenarios and must calculate how much capital would be wiped out under each. In this exercise, however, the ECB will hand out levels of capital depletion and tell banks to come up with scenarios that could cause them.

"In the 2026 thematic stress test exercise, we will follow up on this year’s stress test by asking banks to assess which firm-specific geopolitical risk scenarios could severely impact their solvency," Buch told the European Parliament.

In addition to the stress test, supervisors have been telling banks for months to prepare for politically motivated disruption, including a global dollar drought if the Federal Reserve withdraws its lifelines.

As part of the ECB's regular supervisory work, banks have been told to watch their exposure to other countries, both via operations abroad and through credit to exporters, central bank sources have told Reuters.

Cyber attacks are seen as a risk too, particularly in Baltic countries, which have previously been the targets of Russian hackers, the sources said.

Supervisors are not telling banks to cut their exposures and they are not making specific recommendations at this stage, but rather urging banks to tighten their controls and think about contingency plans.

An ECB spokesperson declined to comment.

Next year's ECB exercise will be part of banks' self-evaluation of their capital needs, known in regulatory jargon as the Internal Capital Adequacy Assessment Process.

The ECB runs thematic health checks on euro zone banks every other year, when there is no European Union-wide stress test by the European Banking Authority.

Its latest, in 2024, was about cyber-resilience.

The results of the EBA's latest stress test, which includes some U.S. tariffs in its adverse scenario, will be announced in early August.

(Editing by Kirsten Donovan and Mark Porter)