The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) published a joint report assessing how geoeconomic fragmentation, geopolitical shocks and policy uncertainty can transmit to the financial system in the euro area and across the European Union. The report maps key transmission channels and sets out a new monitoring framework that integrates geopolitical indicators into financial stability analysis. The analysis finds that geopolitical shocks and policy uncertainty tend to tighten financial conditions, raise financial market stress and risk premia, and weaken loan growth. It notes that geopolitical risks and policy uncertainty have increased markedly since the mid-2010s, with notable rises in 2024 and 2025, while financial market volatility has remained contained or short-lived. Estimates in the report link heightened geopolitical risk to weaker expected growth with significant downside tail risks and higher financial stress, and highlight that geopolitical events can materially change interconnectedness across bonds, commodities, equities and exchange rates. Vulnerabilities are shown to vary across EU Member States, with more open economies and those with higher public debt ratios more prone to amplification effects; banks and non-banks also respond by reducing lending, particularly cross-border exposures, lowering exposure to external shocks but also limiting international diversification. The ECB and ESRB emphasise the need for more harmonised datasets and complementary scenario analysis to support financial stability monitoring and macroprudential calibration. In a related supervisory context, ECB Banking Supervision used geopolitical risk as the focus of the adverse scenario in the 2025 euro area bank stress test and plans to assess banks’ geopolitical risk management as part of the 2026 reverse stress test.
European Systemic Risk Board 2026-01-22
European Central Bank and European Systemic Risk Board publish joint report on financial stability risks from geoeconomic fragmentation
The European Central Bank and the European Systemic Risk Board released a joint report on geoeconomic fragmentation, geopolitical shocks, and policy uncertainty affecting the euro area and EU financial systems. It introduces a monitoring framework incorporating geopolitical indicators into financial stability analysis, highlighting increased risks since the mid-2010s. The report underscores the need for harmonised datasets and scenario analysis, with ECB Banking Supervision focusing on geopolitical risk in the 2025 bank stress test and planning further assessments in 2026.