ECB’s de Guindos Says Top-Down Stress Tests Reveal Vulnerabilities Beyond EU-Wide Exercise

19 November 2025

By David Barwick – FRANKFURT (Econostream) – European Central Bank Vice President Luis de Guindos said Wednesday that while the 2025 EU-wide stress test confirmed banks’ resilience, broader top-down analyses uncovered pockets of vulnerability that support a cautious stance on capital buffers.

In a blog post on the website of the ECB, de Guindos said the bottom-up exercise did not capture several important shock channels, including deleveraging, contagion between banks and non-banks, and climate-related risks.

Top-down stress testing using granular data from the EU-wide exercise provided additional insight into how banks and non-banks would react under an adverse scenario of recession, market turmoil and persistent inflation. Banks would reduce lending, which would improve their capital ratios but at the cost of worsening the downturn, he said.

According to de Guindos, the contraction of credit would lead to an additional cumulative real GDP decline of around 2 percentage points over three years compared with a scenario in which balance sheets remain static. Releasing available macroprudential buffers could moderate the effect but only modestly, he said.

The ECB’s system-wide model also examined second-round contagion risks from investment funds and insurance corporations. Investment funds faced the largest losses, followed by insurers, he said. For banks, spillovers produced only limited Common Equity Tier 1 depletion on average, though institutions with weaker hedging practices could be more affected.

He said the findings underscored the need for a system-wide perspective because solvency-driven liquidity pressures in non-banks could trigger market reactions that propagate through the financial system.

De Guindos wrote that top-down analysis also allowed climate-related risks to be incorporated. Transition risk assumptions increased projected credit losses by about 70bp, driven largely by exposures to energy-intensive sectors, he said. Physical risks, such as flooding, produced a similar impact, he said.

Taking into account all extensions, along with banks’ deleveraging and methodological adjustments, the ECB estimated slightly higher net capital depletion for the EU banking sector, though aggregate results remained below the final outcome of the 2023 stress test. Vulnerabilities, however, were significant for certain business models, he said.

He argued that these results support maintaining a cautious approach to capital buffers. Bottom-up tests remain essential for precision, but top-down models offer flexibility, broader coverage and lower reporting burdens, he said.

De Guindos added that such models help reduce potential biases from banks’ tactical behavior in bottom-up submissions and allow policymakers to test risks not covered by standard methodologies.