ECB Integrates Climate Risk Into EU-Wide Stress Test, Finds Transition and Flood Risks Cut CET1 by 74 and 77 Basis Points

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 — adding up to 151 basis points across the two separate analyses.

TRANSITION RISK AND ENERGY-INTENSIVE SECTORS

The ECB's transition risk scenario found that the shift toward greener investment patterns would increase corporate default probabilities by 50% across all firms. For companies in high energy-intensive sectors, the effect is larger, with default probabilities rising by a median of 91%, according to the Macroprudential Bulletin.

The ECB noted that the largest additional credit losses arise for banks most exposed to high energy-intensive sectors, and that the banks most exposed to climate-related losses may differ from those identified as most vulnerable in the broader stress test.

PHYSICAL FLOOD RISK

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.