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

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. However, these reactions trigger negative credit supply shocks, exacerbating the downturn. Conversely, releasing available releasable buffers reduces banks’ incentives to deleverage and mitigates GDP contraction. These findings highlight how stress test simulations can inform macroprudential policy. More generally, they underscore the value of building sufficient releasable buffers during stable periods, to be used in times of stress to sustain credit supply to the real economy while preserving banks’ resilience. JEL Classification: G20, G28