The European Central Bank increasingly considers geopolitical risk a key area of banking supervision.
What Is Geopolitical Risk?
The ECB defines geopolitical risk as the threat, occurrence and escalation of adverse events associated with wars, terrorism and tensions between states and political actors.
How Does Geopolitical Risk Affect Banks?
Geopolitical risks can materialise through credit, market, operational and funding risks. Geopolitical shocks can affect banks through several transmission channels:
- Financial markets: heightened uncertainty and investor risk aversion, potentially leading to increased market volatility.
- Real economy: sanctions and disruptions to trade flows and supply chains, potentially generating inflationary pressures and weakening economic activity.
- Security and operational resilience: conflicts and geopolitical tensions can affect banks’ operational resilience and increase their exposure to cyberattacks and service disruptions.
The ECB’s Supervisory Response
In recent publications, the ECB has highlighted several measures to strengthen the banking sector’s resilience to geopolitical risk:
- Greater supervisory focus on geopolitical risk as part of the ECB’s supervisory priorities for 2025–2027.
- Cyber resilience stress testing to assess banks’ ability to respond to and recover from severe cyber incidents.
Enhanced economic monitoring and risk assessment to identify and evaluate risks arising from geopolitical shocks and strengthen supervisors’ awareness of the associated challenges.
