European Central Bank and European Systemic Risk Board publish joint report and monitoring framework on financial stability risks from geoeconomic fragmentation

The European Central Bank and the European Systemic Risk Board have published a joint report on “Financial stability risks from geoeconomic fragmentation”, analysing how rising geopolitical risk and policy uncertainty can affect financial stability in the euro area and across the European Union. The report also sets out a new monitoring framework that integrates geopolitical indicators into financial stability analysis and maps the main transmission channels from geopolitical shocks to the financial system. The analysis finds that geopolitical shocks and policy uncertainty are associated with tighter financial conditions, episodes of market stress, higher risk premia and weaker loan growth. Geopolitical risks and policy uncertainty have risen markedly since the mid-2010s, with notable increases in 2024 and 2025, while financial market volatility has generally remained contained or short-lived. Estimates point to lower expected growth outcomes with significant downside tail risks and heightened financial stress, and geopolitical events can materially change interconnectedness across bonds, commodities, equities and exchange rates. Vulnerability is uneven across EU Member States, with more open economies and those with higher public debt ratios more prone to amplification effects; banks and non-banks tend to respond by reducing lending, particularly cross-border exposures, which can lower exposure to external shocks but also reduces international diversification. The ECB and the ESRB call for more harmonised datasets and complementary scenario analysis to support financial stability monitoring and macroprudential policy calibration.