ECB: Wars, cyberattacks could challenge euro zone banks' FX liquidity

The ECB employed a "reverse stress test" where lenders devised their own scenarios, designed to lower their Common Equity Tier 1 (CET1) ratio by 300 basis points.

Commonly applied trigger events included military conflicts, supply chain disruptions (including energy), economic sanctions, macroeconomic confidence effects, political instability, and cyberattacks. While banks' liquidity positions generally remained above regulatory minimums, the ECB noted inconsistencies in how some institutions translated shocks into capital and liquidity impacts, stating it would follow up with concerned banks to improve their frameworks.

Foreign currency liquidity was identified as structurally tighter and more pronounced for some banks under stress, potentially pushing them below the 100% minimum liquidity coverage ratio. The ECB also pointed out that some banks might have underestimated foreign currency risks by projecting limited variability in foreign exchange liquidity metrics, which could hinder their ability to capture funding risk.

A quarter of the 110 banks directly supervised by the ECB explicitly mentioned a Middle East conflict among their most relevant risks. Other top scenarios included an escalation of the war in Ukraine, worsening trade ties between the U.S. and China, and rising tensions over Taiwan. Banks assumed these risks would transmit primarily through the real economy, with financial markets as a secondary channel.

Military conflicts were seen as particularly detrimental to agriculture, accommodation, and food services, while macroeconomic confidence effects and cyberattacks strongly impacted manufacturing and transport. Energy supply disruptions negatively affected a wide range of sectors. Various scenarios also included mitigating actions by banks, such as selling businesses, increasing capital, or cutting dividends, which collectively offset a little more than a third of the capital loss. However, the ECB expressed skepticism about the implementability of some of these proposed measures.