Buch: Geopolitical risks test banking resilience
Claudia Buch, Chair of the ECB Supervisory Board, told the Eurogroup that Europe's banking sector remains resilient but faces increasing geopolitical risks. The Middle East conflict could test this resilience through credit, market, and cyber channels.
Three channels of geopolitical risk
Claudia Buch highlighted how the Middle East conflict adds to a challenging geopolitical environment, impacting energy prices, inflation, and growth.
This could affect banks through three main channels.
First, credit risk may increase, particularly in energy-intensive sectors like manufacturing and transportation, as weaker growth and higher inflation impair borrowers' debt servicing capacity.
While direct exposures are modest, indirect effects could be substantial.
Second, heightened geopolitical stress may trigger sharp price movements and market illiquidity, posing vulnerabilities for banks reliant on wholesale funding and increasing counterparty credit risk.
Third, modern conflicts have a cyber dimension, making critical financial infrastructure potential targets.
Operational resilience is therefore crucial for euro area banks.
Capital strength meets digital challenges
The euro area banking sector maintains strong capital and liquidity positions, with significant banks reporting a Common Equity Tier 1 ratio of around 16% and a leverage ratio slightly below 6% in 2025.
New capital rules under CRR III, implementing Basel III, have been met without significant impact on capital requirements due to phase-in arrangements.
However, operational resilience is challenged by an elevated and evolving cyber threat environment, fueled by geopolitical developments and rapid AI advances.
While DORA requirements and the 2024 cyber resilience stress test have helped, banks must continuously strengthen vulnerability management and detection capabilities.
The 2025 EU-wide stress test confirmed the sector's sufficient capitalisation to absorb losses from geopolitical events.
Integration, not lower capital, is key
Calls for lower capital requirements in Europe are misguided, as they would increase fragility and not guarantee more lending.
True competitiveness stems from individual bank performance, innovation, and a robust framework, not a race to the bottom on capital.
Completing Basel III, adapting to digital innovation, and fostering deeper market integration, including a European deposit insurance scheme, are the real priorities for a resilient and competitive banking sector.