ECB and ESRB warn of financial stability risks from geoeconomic fragmentation
The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) today published a joint report analysing how rising geopolitical risks and heightened uncertainty can affect financial stability in the euro area and across the European Union. The report identifies key transmission channels and highlights that geopolitical shocks can amplify financial stress and dampen economic growth.
Geopolitical risks tighten financial conditions
Geopolitical risks and policy uncertainty have risen markedly since the mid-2010s, with notable increases observed in 2024 and 2025. These risks tend to lead to tighter financial conditions, financial market stress, increased risk premia, and reduced loan growth.
The report highlights that geopolitical events can significantly alter the interconnectedness between bonds, commodities, equities, and exchange rates.
While financial market volatility has remained contained or short-lived, estimates suggest that geopolitical risks lower expected growth outcomes, with significant downside tail risks for the real economy.
The report also sets out a new monitoring framework that integrates geopolitical indicators into financial stability analysis, aiming to enhance the detection and evaluation of these risks for the financial sector.
Vulnerabilities and the call for better data
The report highlights that the impact of geopolitical shocks varies across EU Member States, with more open economies and those with higher public debt ratios being more vulnerable.
Banks and non-banks respond by reducing lending, particularly cross-border exposures.
While this lessens direct exposure to external shocks, it also limits international diversification.
Given accelerating geoeconomic fragmentation, the ECB and ESRB emphasize the need for enhanced, harmonised datasets and complementary scenario analyses.
These are vital for preserving financial stability and strengthening economic resilience, enabling policymakers and financial institutions to better assess geopolitical risks and tailor macroprudential policy responses.
Timely warning, challenging implementation
This report provides a timely overview of an increasingly critical risk landscape for the euro area.
While the identification of transmission channels is robust, implementing enhanced datasets and harmonised scenario analyses will pose significant coordination challenges.
The findings underscore the urgent need for proactive macroprudential policy adjustments to fortify the financial system against these evolving threats.