ECB’s 2026 Geopolitical Reverse Stress Test: Why Channels Matter More Than Numbers 

Introduction: Why This Matters Now 

Geopolitical risk has become a defining feature of today’s financial landscape. Trade fragmentation, sanctions, and regional conflicts are reshaping markets and business models. Recognizing this, the European Central Bank (ECB) will run a thematic Reverse Stress Test (RST) on geopolitical risk in 2026 as part of its explicit supervisory priorities. Unlike traditional stress tests, RST starts from a failure condition and works backward to identify plausible scenarios that could lead to this situation.  

Hence, this exercise is not about plugging in generic macro shocks—it’s about uncovering hidden vulnerabilities. And that requires one critical ingredient: an informed and detailed view of how geopolitical events may affect your organization. 

The Key Challenge: Seeing the Full Picture 

To pass muster with supervisors, selecting and explaining the transmission channels will matter far more than the numerical modeling. If relevant channels are missed, the backward search becomes blind, undermining the credibility of the entire exercise. The ECB has made clear that banks must go beyond traditional macroeconomic modeling and identify how disruption to trade flows and supply chains, cyberattacks, and even physical risks related to conflicts might affect banks and their clients, and in turn how this transmits to banks’ capital, liquidity, and operations.  

While the ECB has mapped out the primary pathways through which geopolitical risks propagate, the size and nature of the impact will very much depend on each bank’s location, exposures, and business models — meaning a one-size-fits-all approach will not work. Reverse stress testing is designed to uncover failure pathways, but this only happens if transmission channels have been studied and selected with care.  

Building a granular, bank-specific taxonomy of geopolitical risk drivers and their linkages to the portfolio is therefore a critical step. 

What Does a Geopolitical Risk Taxonomy Look Like? 

Well-defined transmission channels should link high-level risk drivers to specific impacts and risk parameters. For example: 

• Drivers: Trade tensions, sanctions, regional conflicts, cyber threats, energy disruptions, and overall market volatility. 

• Impacts: Credit losses (through direct and indirect exposures), loss of revenue (loss of markets, loss of pricing power), cost increases (funding costs, safety and security measures, insurance premiums, staff compensation and relocation), compliance and legal risks (sanctions breaches, disputes). 

• Risk Parameters: PD and LGD shocks, market risk factors, operational risk metrics. 

Once relevant transmission channels have been defined and quantified, the severity of the shocks to the risk drivers can be tuned so that the targeted reverse stress impact is achieved. In the case of the ECB reverse stress test, a CET1 capital impact of 300 basis points is targeted. Finding a balanced set of shocks to achieve the reverse stress target will require expert judgement and needs to be documented properly. 

A layered approach like this will help ensure that the exercise does not become a paper product but a strategic diagnostic tool that meets supervisors’ expectations. In our next blog, we will spend more time on how to set up a proper taxonomy and make it actionable for your organization. 

How Zanders Can Help 

At Zanders, we support banks in building a robust RST framework. Our approach includes: 

• Quantitative modeling to support or benchmark scenario design.  

• Advisory support to design a purposeful, bank-specific taxonomy and link it to ICAAP. 

• Hands-on assistance during stress test exercises, leveraging our experience with several European banks. 

• Tool development and deployment of our Credit Risk Suite (CRS) for scenario modeling, automated ECL and CET1 impact calculations, and advanced scenario building. 

With Zanders, you can move beyond compliance to create a stress test framework that enhances your strategic capability.