Central banks

Simulating dynamic balance sheet reactions and macroprudential policy using the 2025 EU-wide stress test

11/19/2025 European Central Bank Central banks

Stress test simulations can enhance our understanding of the interplay between bank actions, the real economy and macroprudential buffers. Leveraging BEAST, the ECB’s workhorse top-down stress test model, this article explores impacts stemming from bank behavioural reactions by simulating them under the adverse scenario of the 2025 EU-wide stress test. The article shows that allowing banks to adjust their balance sheets only improves their capital ratios to a minor extent compared with simulations where they are assumed to keep their balance sheets constant.

Integrating climate risk into the 2025 EU-wide stress test: the effects of climate risks for firms

11/19/2025 European Central Bank Central banks

As authorities across the euro area work towards including climate risks into regular stress-testing frameworks, this article offers a starting point for assessing bank resilience to climate risks that materialise under a short-term horizon. This is relevant since acute physical risks and abrupt policy changes can also materialise at short notice and affect the balance sheet of financial institutions.

Integrating contagion risk into the 2025 EU-wide stress test: a system-wide analysis with amplification effects between banks and non-banks

11/19/2025 European Central Bank Central banks

This article expands the 2025 EU-wide stress test by incorporating a system-wide perspective to capture contagion risks across investment funds and insurance corporations alongside the banking sector. It examines potential short-term contagion effects under the EBA’s adverse scenario as financial institutions adjust their balance sheets in response to stress. These adjustments would result in additional average CET1 ratio depletion of 29 basis points, increasing first-round effects by 12%.

A framework to assess the severity of adverse scenarios in EU-wide stress tests

11/19/2025 European Central Bank Central banks

The severity and the plausibility of stress test scenarios are crucial elements for interpreting the results and ensuring the credibility of stress-testing exercises. This article introduces a comprehensive framework for assessing scenario severity and plausibility in the context of the adverse scenarios used in the EU-wide stress tests. Two families of indicators are developed, characterised by a backward-looking and a forward-looking perspective.

Beyond the single bank: macroprudential insights from the 2025 EU-wide stress test and its extensions

11/19/2025 European Central Bank Central banks

This overview article provides an introduction to the 2025 Macroprudential Stress Test Extension Report (MaSTER), released as the 32nd edition of the Macroprudential Bulletin, which investigates how the EU-wide stress test and its extensions provide a broader assessment of the systemic vulnerabilities of euro area banks. The 2025 EU-wide stress test results are expanded via a top-down model-based toolkit to assess additional risks, perform policy simulation exercises, and present novel approaches to gauging the severity of the adverse scenario.

Labor supply response to windfall gains

11/18/2025 European Central Bank Central banks

Using a large survey of euro area consumers, we conduct an experiment in which respondents report how they would adjust their labor market participation, hours worked, and job search effort (if not employed) in response to randomly assigned windfall gain scenarios. Windfall gains reduce labor supply, but only when the gains are substantial. At the extensive margin, gains of €25,000 or less have no effects, while gains between €50,000 and €100,000 reduce the probability of working by 1.5 to 3.5 percentage points.

Labor supply response to windfall gains

11/18/2025 European Central Bank Central banks

Using a large survey of euro area consumers, we conduct an experiment in which respondents report how they would adjust their labor market participation, hours worked, and job search effort (if not employed) in response to randomly assigned windfall gain scenarios. Windfall gains reduce labor supply, but only when the gains are substantial. At the extensive margin, gains of €25,000 or less have no effects, while gains between €50,000 and €100,000 reduce the probability of working by 1.5 to 3.5 percentage points.

The fiscal sources of euro area inflation through the lens of the Bernanke-Blanchard model

11/17/2025 European Central Bank Central banks

We estimate the contribution of discretionary fiscal policy measures to euro area inflation in the post-pandemic era using an extension of Bernanke and Blanchard (2024b)’s semi-structural model. Since the pandemic, aggregate discretionary fiscal measures had a modest yet progressively increasing positive contribution to inflation that partly worked through an indirect effect on wage growth and inflation expectations. However, net indirect taxes helped to contain inflationary pressures, both during the pandemic and energy crises.

The fiscal sources of euro area inflation through the lens of the Bernanke-Blanchard model

11/17/2025 European Central Bank Central banks

We estimate the contribution of discretionary fiscal policy measures to euro area inflation in the post-pandemic era using an extension of Bernanke and Blanchard (2024b)’s semi-structural model. Since the pandemic, aggregate discretionary fiscal measures had a modest yet progressively increasing positive contribution to inflation that partly worked through an indirect effect on wage growth and inflation expectations. However, net indirect taxes helped to contain inflationary pressures, both during the pandemic and energy crises.

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