Euro Zone Banks Face Risks from Wars, Cyberattacks, Supply Chain Disruptions

The European Central Bank (ECB) has conducted a stress test on euro zone banks to assess their resilience in the face of various risks, including wars, cyberattacks, and supply chain disruptions. The 'reverse stress test' exercise asked lenders to come up with scenarios themselves that could lower their Common Equity Tier 1 (CET1) ratio by 300 basis points.

The ECB stated that banks' liquidity positions generally remained above regulatory minimum requirements under the various scenarios, but some inconsistencies were found in how banks translated shocks into capital and liquidity impacts. The central bank will follow up with the banks concerned to improve their stress-testing frameworks.

Foreign currency liquidity was found to be structurally tighter, and stress would be more pronounced for some banks, which could then fall below the 100% minimum liquidity coverage ratio. Some banks may have underestimated foreign currency risks by projecting limited or no variability in foreign exchange liquidity metrics.