European financial supervisors warn of geopolitical threat to stability

Europe’s three supervisory authorities for insurance, banking and securities have called for “vigilance” amid trade tensions, global policy uncertainty and geopolitical fragmentation. Insurance regulator Eiopa, the European Banking Authority EBA and the European Securities and Markets Authority ESMA, known collectively as ESAs, warn that “growing geopolitical tensions and rising cyber risks present significant challenges to financial stability”. The ESAs added that Europe’s insurers and other financial institutions will be more exposed to systemic risks such as extreme weather events and cyberattacks on critical infrastructure as levels of global cooperation dip. Trade disputes, rapidly shifting policies, ongoing international conflicts and the prospect of economic fragmentation “are reshaping global markets, requiring heightened vigilance and adaptability from supervisors and financial entities alike”, the ESAs said in a joint update on risks to Europe’s financial system presented at the EU’s Economic and Financial Committee last week. The bodies said financial institutions “must navigate growing uncertainties” from emerging geopolitical risk. It urged supervisors and financial firms to “stay ready” to adapt in case of trade and supply chain disruptions and declines in global trade volumes. “Tariffs threats are furthering uncertainty and tensions,” they said, adding: “Ensuring resilience in the face of these developments is crucial.” The ESAs stressed the role of proactive risk management, as well as stronger cyber resilience and closely monitoring global financial linkages, including currency risks. It said firms and supervisors should monitor macroeconomic and geopolitical risks in risk management frameworks, including scenario analysis of potential impacts on exposures, capital, liquidity, funding, business models and operational resilience. “Be ready to react to risks, including plans (e.g. recovery plans and adequate provisioning) to address challenges,” the statement said. “As financial markets continue to evolve, international cooperation and regulatory preparedness will be key to maintaining stability. Against a background of high geopolitical risks, the ESAs recommend that supervisors and financial entities prepare for continued market volatility, consider the potential materialisation of liquidity risks, and stand ready to adapt to adverse developments, including by provisioning adequately,” the statement added. The ESAs said the long-term effects could be more significant, especially in the case of breakdown of economic and political integration. Tariffs could reduce EU exports to the US, potentially lowering GDP growth, and credit risk may rise for industries heavily affected by tariffs, leading to potential downgrades in bonds, the statement said. It also highlighted the impact of trade credit insurance and non-life insurance, which could be more in demand as concerns oversupply chain disruptions rise. But at the same time, a decline in global trade volumes and recessionary pressures could reduce demand for insurance products, the ESAs said. They also warned of potentially higher reinsurance costs driven by more exposure to currency volatility, and increased claims costs for insurers, particularly if in foreign currencies. The ESAs said regulators and financial firms must support the “timely” implementation of the Digital Operational Resilience Act (DORA) to better manage cyber and digitalisation risks and ensure compliance with the AI Act.

European financial supervisors warn of geopolitical threat to stability

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