At the end of July, the European Central Bank announced the results of its first "geopolitical risk reverse stress test". Rather than a conventional stress test, ECB risk managers were required to start from a writing prompt along the lines of "You have just made a large loss of 3 per cent of your regulatory capital; explain how it happened" and come up with some kind of story involving "geopolitical risk". The ECB supervisors put together a chart which compares the assumptions made in each bank's scenario with the historical outcomes for a number of variables.

The table displays for each scenario variable the severity of shocks applied by banks for their home jurisdiction in their geopolitical stress scenario. With regard to the yield curve, i.e. (10-year bond yield) - (3-month EURIBOR), the colour coding corresponds to the cross-bank distribution of shocks applied in the reverse stress test. Each column represents an individual bank.

Overall, banks listed mitigating actions that look plausible and relevant given the geopolitical stress events considered. Nonetheless, in some cases envisaged actions were found to be overly optimistic in terms of being implementable in a severe systemic crisis situation where many banks may struggle to execute such measures.