The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) have published a joint report analyzing how rising geopolitical risks and geoeconomic fragmentation affect financial stability in the euro area and the wider EU. The report identifies key channels through which geopolitical shocks can impact the financial system, including tighter financial conditions, increased market stress, higher risk premia, and reduced loan growth.
Key findings include:
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Geopolitical risks and policy uncertainty have grown sharply since the mid‑2010s, particularly in 2024 and 2025.
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Geopolitical shocks can lower expected economic growth and increase tail risks for the real economy, while also heightening financial stress.
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The effects vary across EU member states, with more open economies and those with high public debt being more vulnerable.
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Banks and non-bank financial institutions respond to geopolitical shocks by reducing lending, especially cross-border exposure, which limits diversification but mitigates external risk.
The report introduces a new monitoring framework that integrates geopolitical indicators into financial stability analysis and emphasizes the need for harmonized data and scenario analysis to enhance resilience. The insights aim to help policymakers and financial institutions better detect, assess, and respond to geopolitical risks.
For more information, the ECB and ESRB report encourages media contact with Verena Reith (+49 69 1344 5737).
Prepared by financial stability experts from the ECB’s Macroprudential Analysis Group and the ESRB’s Analysis Working Group.
