The European Central Bank and the European Systemic Risk Board released a joint report analyzing how geopolitical risks and fragmentation impact financial stability in the EU and euro area, highlighting transmission channels and policy implications.
The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) published a joint report titled Financial stability risks from geoeconomic fragmentation, including a technical annex. The report examines how rising geopolitical risks and increased uncertainty can affect financial stability in the euro area and the European Union.
The report identifies key transmission channels through which geopolitical shocks can propagate to the financial system. Findings indicate that geopolitical shocks and policy uncertainty tend to lead to tighter financial conditions, financial market stress, higher risk premia, and reduced loan growth.
Geopolitical risks and policy uncertainty have increased significantly since the mid-2010s, with notable rises in 2024 and 2025. Despite this, financial market volatility has remained contained or short-lived.
Estimates suggest that geopolitical risks lower expected economic growth and pose significant downside risks for the real economy, along with increased financial stress. Geopolitical events can alter the interconnectedness between bonds, commodities, equities, and exchange rates.
The impact of these shocks varies across EU member states, with more open economies and those with higher public debt ratios being more vulnerable to amplification effects.
In response, banks and non-bank financial institutions adjust their balance sheets by reducing lending, especially cross-border exposures. While this reduces external shock exposure, it also limits international diversification.
Given the rise in geoeconomic fragmentation and ongoing geopolitical uncertainty, the ECB and ESRB emphasize the need for improved, harmonized datasets and scenario analyses to maintain financial stability and enhance economic resilience.
The insights from the report aim to help policymakers and financial institutions better detect, evaluate, and respond to geopolitical risks and calibrate macroprudential policies accordingly.
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