Stress tests on European banks: Italian banks set an example of stability

Translated by Jennifer Di Giacomo

For several years now, the global economy has been characterized by significant instability and growing uncertainty due to the unpredictable evolution of open conflicts both in Europe, between Russia and Ukraine and in the Middle East, which has seen Israel as the main protagonist of armed clashes in the region. This state of uncertainty and market volatility has been exacerbated by the new position of the United States in the global geopolitical and macroeconomic landscape, which, since the beginning of President Trump's term in office, has shifted towards aggressive and protectionist economic policies. This was done in order to reduce its dependence on foreign imports, introduce new trade tariffs, and finally initiate attempts to renegotiate multilateral trade relations.

These events, as unpredictable as they are unscrupulous, have caused panic in the financial markets, triggering deep and sharp falls in stock prices and creating uncertainty about the stability and reliability of the national economic structure and, more broadly, of the European continent.

On July 28th, the European Banking Authority (EBA) and the European Central Bank (ECB) published the results of a study conducted on the banking sector, which assessed the ability of European credit institutions to withstand the consequences of a hypothetical scenario of severe global economic downturn. The study, which involved 64 large credit institutions selected by the EBA, representing 75% of banking assets, simulated an extreme scenario of change in the global economic balance, due to a hypothetical deterioration in current geopolitical relations. In addition, it simulated high inflation, rising unemployment, and an increase in interest rates, with consequent negative repercussions on private consumption and investment. This catastrophic scenario represented one of the most severe stress tests ever conducted in Europe and made it possible to assess fairly accurately the resilience of the European banking system and its ability to continue financing households and businesses, even in the midst of a global economic crisis.

The stress test results published by the EBA reveal that, in this scenario, European banks would record a total capital loss of 547 billion Euros between 2025 and 2027, and that the Common Equity Tier 1 (CET 1), with an average contraction of 370 basis points, would fall from 15.8% in 2024 to 12.1% in 2027.  The Common Equity Tier 1 is a percentage indicator that measures the financial soundness of banks by comparing the ordinary capital paid into the credit institution with risk-weighted assets. The ECB has previously established that this value must be above 8% for all banks in countries subject to the Single Supervisory Mechanism (SSM). Therefore, a high CET 1 value is an indicator of a bank's ability to cope with times of crisis without compromising its operations (in Italy, the CET 1 value cannot be less than 10.5%).

Although the losses are greater than those estimated in previous stress tests, the reduction in capital was more moderate, thanks to a high net interest income (NII) margin, which gives banks greater room for maneuver to offset and absorb losses in the unfortunate event that the examined scenario should actually occur. The results show that credit risk is the main factor contributing to losses, accounting for 394 billion Euros over three years, while market risk due to a possible recession, which was estimated at 187 billion Euros in losses in the first year of the simulation, was almost halved to around 98 billion Euros thanks to banks' revenues from financial transactions carried out by account holders. This absorption capacity is due to the improved quality of bank assets and a process of strengthening and resilience that banks have developed over the last few years.

In the EBA's ranking of credit institutions, the best performances were recorded by Portugal (economic loss of less than 50 basis points), Sweden (less than 100 basis points), Hungary, and Greece (loss of just over 100 basis points). Italian banks proved to be highly reliable and stable, standing out as among the most solid in Europe, with an average capital absorption of around 150 basis points (1.5 percentage points) compared to almost 400 basis points in Germany and France. Among the six major Italian banks analysed by the EBA, Iccrea leads the ranking with a CET1 ratio falling from an initial 23.3% in 2024 to 21.3% in 2027, followed by Montepaschi di Siena (from 18.3% to 17.1%), Bper Banca (from 15.8% to 14.1%), UniCredit (from 16% to 12.5%), Intesa Sanpaolo (from 13.3% to 12%) and finally Banco BPM (from 15% to 11.4%).

The overall result of this study confirms that the European banking sector, strengthened by higher interest rates and stable asset quality, would be able to withstand a hypothetical prolonged scenario of severe recession caused by economic tariffs and further escalation due to the deterioration of international geopolitical relations. Although “the solid performance of EU banks in the 2025 EU-wide stress test is reassuring, this should not lead to complacency on the part of banks or supervisory authorities,” warns the EBA. “Maintaining adequate capital remains essential to ensure that the EU banking system can continue to support the economy in adverse conditions and avoid becoming a source of amplification during crises.”

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