Machado flags geopolitical risks, banking union hurdles, and securitisation concerns

Pedro Machado, Member of the Supervisory Board of the ECB, confirmed that European banks' direct exposures to Israel and Iran are modest, totaling around 0.7% of Common Equity Tier 1 (CET1) capital on the assets side and 0.6% on the liabilities side.

Even with neighboring countries included, exposures are contained, representing less than 1% of total assets.

While Turkey hosts some European bank subsidiaries, no immediate stress is observed.

Machado noted that potential energy cost increases, depending on the conflict's breadth, could lead to inflation spikes and recessionary impacts, affecting unemployment and, consequently, banks.

He emphasized that banks should integrate geopolitical events into their capital planning and internal stress-testing frameworks, citing the 2026 geopolitical reverse stress test.

This exercise is purely capital-driven.

The SSM closely monitors foreign exchange exposures, but currently sees no stress in US funding activities or access to US capital markets.

Machado highlighted the lack of a European deposit insurance scheme (EDIS) as a key hurdle to banking union, exacerbating the sovereign-bank nexus and promoting ring-fencing.

'Branchification' could theoretically reduce fragmentation, but significant costs deter banks from converting subsidiaries to branches.

Cross-border mortgage and SME lending remains minimal due to differing insolvency, collateral enforcement, and property laws across jurisdictions.

Obstacles to cross-border mergers also include EDIS and varying tax/accounting treatments.

The SSM assesses mergers solely on prudential requirements, business model viability, risk management, and governance, explicitly disregarding political dimensions.

Furthermore, fit and proper reassessments for board members are triggered by new facts, such as sanctions or on-site inspection findings, not necessarily judicial decisions.