ECB and ESRB warn of financial stability risks from geoeconomic fragmentation
The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) have published a joint report on financial stability risks stemming from geoeconomic fragmentation. The report identifies key transmission channels through which geopolitical shocks can impact the financial system.
Geopolitical shocks tighten financial conditions
The report highlights that geopolitical shocks and political uncertainty tend to result in tighter financing conditions, financial market stress, increased risk premiums, and a decline in credit growth.
Geopolitical risks have significantly increased since the mid-2010s, with notable surges in 2024 and 2025. These risks are estimated to have a dampening effect on growth expectations, posing substantial downside risks to the real economy, often accompanied by heightened financial stress.
Geopolitical events can also considerably alter the interdependencies between bonds, commodities, equities, and exchange rates.
Banks adapt, call for better data
The impact of geopolitical shocks varies across EU member states, with more open economies and countries with higher public debt ratios tending to be more vulnerable.
In response, banks and non-banks are adjusting their balance sheets by reducing lending, particularly cross-border claims.
While this somewhat shields the financial system from external shocks, it comes at the cost of international diversification.
The ECB and ESRB emphasize the importance of improving and harmonizing existing datasets and complementing them with further scenario analyses to safeguard financial stability and strengthen economic resilience.
A new risk on the radar
This joint report marks a crucial step in integrating geopolitical risks into financial stability analysis.
The proposed monitoring framework provides essential tools for policymakers to better assess and mitigate these evolving threats.
Ultimately, a proactive approach is vital to ensure the resilience of the financial system in an increasingly fragmented global landscape.