The European Central Bank has extended its EU-wide stress test results to incorporate both climate transition risk and acute physical climate risk, publishing its findings in the November 2025 edition of its Macroprudential Bulletin. At an aggregate level, the analysis finds that transition risks reduce common equity tier 1 capital by 74 basis points, whilst acute physical flood risks add a further 77 basis points — a combined capital drag of 151 basis points across the eurozone banking sector if both risk categories materialise simultaneously.
The publication represents a significant step in the ECB's continuing programme to embed climate-related financial risk into mainstream supervisory and macroprudential analysis. By layering climate scenarios on top of the existing EU-wide stress test architecture, the exercise provides regulators and market participants with one of the most detailed quantitative assessments yet of how the green transition and physical climate events could affect bank balance sheets in tandem.
TRANSITION RISK HITS ENERGY-INTENSIVE SECTORS HARDEST
The ECB's transition risk scenario found that the shift toward greener investment patterns would increase corporate default probabilities by 50% across all firms as companies grapple with the cost of transitioning their business models, upgrading assets, and complying with evolving environmental regulations. For companies in high energy-intensive sectors — those most exposed to stranded asset risk and carbon pricing — the effect is far more severe, with default probabilities rising by 91%, according to the Macroprudential Bulletin.
These elevated default probabilities flow directly through to bank loan books, as higher corporate credit stress translates into greater expected losses on lending portfolios. The resulting 74-basis-point reduction in CET1 capital illustrates how a disorderly or rapid green transition could meaningfully erode the capital buffers that eurozone banks have built over the past decade of regulatory and supervisory pressure. The scale of impact varies considerably across individual institutions depending on the sector mix and geographic distribution of their credit exposures.
The ECB noted that banks with heavier concentrations of loans to carbon-intensive industries or to borrowers located in regions more exposed to transition policy changes face disproportionately larger capital impacts, reinforcing the importance of portfolio-level climate risk management at the firm level as well as aggregate macroprudential monitoring.
PHYSICAL FLOOD RISK ADDS FURTHER CAPITAL PRESSURE
The acute physical risk component of the stress test extension focused on flood scenarios, finding that such events could reduce CET1 capital by 77 basis points at the aggregate eurozone level. Flood events represent one of the most widely modelled acute physical risks for the banking sector given their capacity to damage collateral securing bank loans, disrupt the operations of corporate and retail borrowers, and produce sudden and concentrated deterioration in asset quality across geographically exposed portfolios.
The ECB emphasised that the exercise is designed to inform macroprudential policy discussion rather than to generate immediate additional capital requirements for individual institutions. Nevertheless, the findings reinforce existing supervisory expectations that banks should be advancing their internal capabilities for assessing climate-related financial risk, consistent with guidance and requirements the ECB has issued through its supervisory arm over recent years. The Macroprudential Bulletin analysis adds quantitative weight to those qualitative expectations.