As part of our ongoing series on the ECB’s 2026 Geopolitical Reverse Stress Test, we previously explored why channels matter more than numbers and how geopolitical risk shapes failure pathways in reverse stress testing.

Why This Matters

A key objective of the ECB’s 2026 Reverse Stress Test is for banks to assess the resilience of their business model. This requires a comprehensive taxonomy of geopolitical risk drivers linked to business impact via plausible transmission channels. Without this foundation, reverse stress testing becomes guesswork, blind to hidden vulnerabilities and hard to defend under supervisory scrutiny.

Step 1: Identify and Engage the Right Stakeholders

Creating a useful taxonomy is not a siloed exercise. It requires bringing together a cross-functional working group: risk management to define categories and metrics, treasury and finance to assess balance sheet sensitivities, business lines to validate exposures, geography and concentrations, compliance and legal to capture sanction regimes and regulatory constraints. Early engagement ensures the taxonomy reflects the bank’s unique business model and risk profile.

Step 2: Structure the Taxonomy Using a Layered Approach

The starting point is to move from broad geopolitical themes to tangible impacts. Begin by identifying high-level drivers such as sanctions, trade fragmentation, energy disruption or military escalation.

From there, think about how these drivers ripple through the organization—through financial markets, the real economy, and safety & security. The goal is to connect these channels to your business model and balance sheet exposures, and then drill down to measurable risk parameters like PD/LGD shocks or market sensitivities.

Step 3: Apply Robust Modeling Approaches and “Reverse-Orientation”

Once the taxonomy is defined, the next step is to make it actionable. Start with scenario-based analysis to explore plausible geopolitical shocks and their effects across channels. Then, use sensitivity screening to identify which sectors and counterparties are most exposed.

It is not uncommon for this exercise to yield a constellation of viable assumptions leading to the desired outcome; quantitative methods, such as Monte Carlo simulations or optimization methods, can aid in exploring the solution space and guide in the choice of the scenario which best fits the profile and narrative of your organization. The aim is not to build the most complex model but to ensure the taxonomy translates into meaningful insights for decision-making.

Step 4: Leverage External Data and Benchmarks

No taxonomy should be built in isolation. External data adds credibility and depth. Regulatory guidance from the ECB provides a clear baseline, while industry benchmarks and rating agency data can help calibrate sector sensitivities.

Geopolitical risk indices and historical stress events offer valuable context for scenario design. Combining internal insights with external references ensures your taxonomy reflects both supervisory expectations and real-world dynamics.

Step 5: Establish Governance and Documentation

Finally, governance is what turns a taxonomy into a trusted framework. This means securing board-level oversight, involving cross-functional committees, and maintaining clear documentation of assumptions and methodologies.

Regular updates are essential, as geopolitical risks evolve. A well-governed process not only satisfies regulatory scrutiny but also embeds the taxonomy into the bank’s risk culture, making it a living tool rather than a one-off exercise.

How Zanders Can Help

We guide banks through this process end-to-end:

• Quantitative modeling to support or benchmark scenario design.
• Advisory support to design and validate a complete taxonomy.
• Hands-on assistance during stress test exercises, leveraging experience with European banks.
• Tooling development or deployment of our Credit Risk Suite (CRS) for scenario modeling, automated ECL/CET1 impact calculations, and advanced optimization techniques.

Transform compliance into strategic capability for resilience. Contact us to find out how we can help your organization.

Read our previous blog on ECB 2026 Geopolitical Reverse Stress Test.

Why This Matters

For banks, the ECB’s 2026 thematic reverse stress test on geopolitical risk is more than a regulatory exercise. It’s a reality check on failure pathways. The cost of missing how shocks transmit through your business can be severe: capital depletion, liquidity strain, and reputational damage when the next crisis hits.

This is not about ticking boxes or plugging in generic macro scenarios. It is about demonstrating to supervisors and to your board that you understand which channels could break your business model and how those channels map to tangible impacts on capital, liquidity, and operations.

In reverse stress testing, you start from a pre-defined failure outcome and work backwards to plausible scenarios that could cause it. In our previous blog, we argued for a bank-specific taxonomy of geopolitical risk drivers because reverse stress testing is only credible when the transmission channels are correctly selected and explained. Today, we take the next step: translating a risk driver into business‑model impact that can credibly produce the failure condition.

Worked Example: Military Escalation

In the context of Military Escalation, as an illustrative example, let’s consider a conflict disrupting shipping lanes in the South China Sea. The chain of transmission may unfold as follows:

• The incident would disrupt global trade routes, creating severe supply chain¹ bottlenecks and driving up costs for  industries depending on imports from and exports to the region. These disruptions would ripple through the real economy, affecting manufacturing, logistics, energy and semiconductor² sectors, and ultimately impacting banks with concentrated exposures in these sectors.

• Investors would seek safe assets, triggering sharp movements in commodity and foreign exchange markets. Banks with open positions in these markets could face significant mark-to-market losses, while liquidity strains emerge as funding costs rise. In addition, cargo insurance premiums on conflict‑adjacent corridors can spike, prompting re-routing and a broader repricing of risk.

• Operational risks would likely increase. Military tensions often coincide with heightened cyber and/or physical threats, increasing the likelihood of state-sponsored attacks on financial infrastructure. Banks would need to increase investment in cyber defence and resilience measures.

• Sanctions may be imposed by multiple parties, exposing banks to potential breaches and contractual disputes with counterparties linked to conflict zones. This adds complexity to transaction screening and legal oversight.

• Finally, these channels translate into measurable risk parameters. Credit portfolios tied to vulnerable sectors would see severe PD shocks, alongside LGD adjustments for collateral impacted by trade restrictions. Together with the market and operational risk impacts described above, they could erode CET1 ratios, revealing failure pathways that standard stress tests might miss.

Reverse The Logic

Because a reverse stress test starts from the outcome, the final step is iterative - the engine room of the exercise. To reach the targeted impact (300 bps CET1 depletion in the ECB’s thematic exercise), you will likely cycle through the channel, mechanism, risk‑parameter mapping and tune the shocks, strengthening or weakening their severity and duration until the constellation of assumptions consistently delivers the failure condition. But a key fallacy is to treat this as a mechanic “tuning” exercise rather than a careful consideration of which combination of shocks and channels that plausibly will drive CET1 below the threshold?

Scaling This Approach

The method extends to other relevant drivers: sanctions, energy disruptions, cyber threats, but the taxonomy must be granular and defensible, with a clear line‑of‑sight from event to channel, and then to portfolio, risk parameters and capital metrics. This strengthens Reverse Stress Testing credibility and ICAAP alignment, and produces governance‑ready narratives for senior decision‑makers.

How We Can Help

We support banks in building a robust RST framework. Our approach includes:

• Advisory support to design a purposeful, bank-specific taxonomy and link it to ICAAP.
• Quantitative modeling to support or benchmark scenario design.
• 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.

DLL (De Lage Landen) is a global asset finance company headquartered in Eindhoven, the Netherlands, and a wholly owned subsidiary of Rabobank. Operating in more than 25 countries, it delivers leasing and asset-based financing solutions across a variety of industry sectors, including agriculture, construction, energy transition, food, healthcare, industrial, technology, and transportation. With a strong focus on responsible finance, the company supports businesses to access capital, manage risk, and make the transition to more sustainable business models.

Central to the company’s financial infrastructure is its global treasury function, based in Dublin, Ireland. This team manages the liquidity and Treasury risk management needs of the group. The team consists of an experienced group of highly qualified financial services professionals who are dedicated to meeting the treasury needs of DLL, covering everything from cash management to foreign exchange and interest rate hedging.

A critical turning point

A core element of DLL’s risk strategy is the use of interest rate swaps to mitigate exposure to interest rate volatility. Given the size and complexity of its global lending portfolio and the direct impact that interest rate movements can have on company earnings, these instruments are essential for maintaining financial stability and predictability.

“We have two large portfolios – euro interest rate swaps and US dollar interest rate swaps,” explains Coyle, Head of Hedge Accounting at DLL. “To mitigate the fair value movements of those swaps, we run macro fair value hedge accounting models in euros and dollars.”

These models allow DLL to align the value of derivatives with the risks they offset. This reduces earnings volatility, provides a transparent view of the company’s risk position, and ensures compliance with accounting standards.

For years, DLL’s hedge accounting models were developed and maintained by a previous provider. Due to regulatory requirements they were no longer allowed to support the models beyond 2025.

Faced with a tight deadline to transition to a new solution, DLL launched a competitive tender process to identify a partner capable of building fair value macro hedge accounting models for both their euro and dollar swap portfolios. To prevent disruption to DLL’s hedge accounting process, replacement models needed to be ready for testing in early 2025, ahead of full deployment a few months later. This challenging timeline relied on delivering a complete, fully tested and operational solution as quickly as possible, rather than following a more gradual, phased approach.

Zanders’ approach stood out because they proposed building a Python-based application from the start – delivering the end product we needed, and within the timeline that we wanted.

Coyle, Head of Hedge Accounting at DLL.

“Another provider suggested an Excel build first, then a Python version later – essentially two separate projects, which would not only take a lot longer but also impacted on the price as well.”

Rapid prototyping and agile development

Once selected in late 2024, Zanders began working on replicating the models. Despite having no access to the original model’s codebase, the Zanders team was able to reverse engineer DLL’s hedge accounting methodology in just a few weeks based.

“They started in December, and by the end of January we had our first models ready for testing,” Coyle recalls.

From February to March, both Zanders and DLL conducted independent back testing using the legacy model as a benchmark to validate outputs. This rigorous comparison helped ensure consistency and build confidence in the new models.

“This gave us comfort that we were on the right road,” Coyle says. “We did find a few things that we wanted to change – such as adding certain risk controls  – and the Zanders team was very open to suggestions. These were implemented quickly, and it was a very easy process.”

By the end of March, the new Python-based applications was fully operational, enabling a seamless transition with no disruption to DLL’s interest rate risk strategy.

Faster, simpler, more integrated

While the primary focus of the project was the replication of DLL’s existing models, it ultimately evolved into an opportunity to streamline and modernize the company’s hedge accountancy processes.

“The new model is much quicker,” explains Marais, Treasury Hedge Accountant at DLL. “The old model had features we didn’t really use that slowed down performance. This was a chance to simplify and focus on what we needed.”

One of the most valuable technical gains was improved alignment with DLL’s internal treasury systems.

“With the new model, we are now able to utilize reports from our own treasury system – that was a significant improvement,” says Marais. Previously, the team had to rely on reports from Rabobank systems and model calculations, but the new model directly interfaces with DLL's internal system. “This makes our work process much quicker and more efficient compared to previously,” Marais adds.

Beyond the technical delivery, the project also stood out for the way it was executed. Working under a tight deadline, collaboration between the teams was critical and made a real difference to the overall experience. The DLL team particularly appreciated Zanders’ responsive and collaborative approach.

IT projects can be quite stressful, but this one was remarkably stress-free. That’s a reflection of a robust, collaborative process and great people. If someone asked whether we’d recommend the Zanders team for a project like this, we wouldn’t hesitate.

Coyle, Head of Hedge Accounting at DLL.

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