ECB and ESRB analyze financial stability risks from geoeconomic fragmentation
The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) have published a joint report analyzing financial stability risks from geoeconomic fragmentation. The report examines how rising geopolitical risks and uncertainty can affect financial stability in the euro area and EU.
The rising tide of geopolitical risk
The European Central Bank and the European Systemic Risk Board's joint report identifies geoeconomic fragmentation and geopolitical risk as critical sources of macro-financial uncertainty.
These factors are shown to significantly impact financial stability across the euro area and the wider European Union.
The report details the key transmission channels through which geopolitical shocks can propagate throughout the financial system, leading directly to a tightening of financial conditions.
This includes observable effects such as heightened financial market stress, an increase in risk premia, and a noticeable reduction in loan growth.
The analysis indicates a marked rise in both geopolitical risks and policy uncertainty since the mid-2010s, with particularly significant increases recorded in 2024 and 2025. Despite these trends, financial market volatility has either remained relatively contained or proved to be short-lived in many instances, suggesting a complex interplay of factors.
From shocks to balance sheets
Geopolitical risks are estimated to lower expected growth outcomes, introducing significant downside tail risks for the real economy, often accompanied by heightened financial stress.
These events can profoundly alter the interconnectedness between bonds, commodities, equities, and exchange rates.
The impact is heterogeneous across EU Member States, with more open economies and those with higher public debt ratios showing greater vulnerability.
In response, banks and non-banks adjust their balance sheets by reducing lending, particularly cross-border exposures.
While this reduces direct exposure to external shocks, it limits international diversification.
The report stresses the importance of enhanced, harmonised datasets and complementary scenario analyses for preserving financial stability and increasing economic resilience.
These insights will help policymakers and financial institutions detect and evaluate geopolitical risks, informing macroprudential policy responses.
A timely warning, not a solution
This report provides a crucial framework for understanding an increasingly complex risk landscape.
While it effectively quantifies the potential for financial stress, it underscores the ongoing challenge of translating insights into concrete, harmonized policy actions.
Its true value lies in prompting institutions to integrate these systemic risks into their own resilience strategies.