The European Banking Authority (EBA) has announced that its upcoming stress tests will assess the resilience of the European banking sector in light of a challenging macroeconomic environment.

These tests will simulate adverse scenarios, including significant geopolitical tensions that could lead to a hypothetical cumulative GDP decline of 6.3%.

As part of this evaluation, the EBA will examine how European banks respond to potential trade wars and geopolitical conflicts.

The ECB's stress tests will include 45 medium-sized banks, such as the Bank of Cyprus.

Banks participating in the stress tests have received the necessary documentation and are required to submit their final results by early July 2025, with interim deadlines set before that.

Of the 64 banks involved, 51 are from countries under the supervision of the European Central Bank (ECB), which will also conduct parallel stress tests on additional banks.

In the context of Cyprus, the adverse scenario predicts economic contractions of -2.4% in 2025 and -4.7% in 2026, with a modest recovery of 0.7% anticipated in 2027.

The stress tests will encompass 64 banks, which represent approximately three-quarters of the banking assets in the European Union and Norway, with results expected to be published in early August 2025.

This adverse scenario also forecasts supply shocks from trade tensions, leading to increased inflation and negative impacts on consumer confidence, employment, and spending.

The EBA emphasizes the importance of transparency in these tests, aiming to promote market discipline by publishing consistent and comparable data.

Stress tests are essential tools for banking supervisors to assess capital requirements and ensure banks can withstand potential losses during crises.

The adverse scenario will include significant negative shocks affecting private consumption and investments, both domestically and globally.