ECB and ESRB publish report on financial stability risks from geoeconomic fragmentation

The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) have published a joint report titled “Financial stability risks from geoeconomic fragmentation” along with a technical annex. The report examines how increasing geopolitical risks and uncertainty can affect financial stability in the euro area and across the European Union.

The report identifies key transmission channels through which geopolitical shocks can influence the financial system. Findings indicate that geopolitical shocks and policy uncertainty tend to lead to tighter financial conditions, market stress, higher risk premia, and reduced loan growth.

Since the mid-2010s, geopolitical risks and policy uncertainty have increased significantly, especially 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 increase downside risks for the real economy, while also raising 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 tend to reduce lending, particularly cross-border exposures, which decreases external shocks but also limits international diversification.

Given the rising geoeconomic fragmentation and ongoing geopolitical uncertainty, the ECB and ESRB emphasize the need for enhanced, harmonized datasets and scenario analyses to maintain financial stability and strengthen economic resilience. The insights aim to assist policymakers and financial institutions in better detecting, evaluating, and responding to geopolitical risks.

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