Protracted geopolitical instability could seriously complicate eurozone banks' access to market funding, particularly in US dollars and other foreign currencies.
This is the conclusion reached by the European Systemic Risk Board (ESRB) in its report "Financial Stability Risks from Geoeconomic Fragmentation." In it, the EU's macroprudential supervisory authority warned that in a context of high uncertainty, even resilient banks could face a shortage of external liquidity and tighter credit conditions.
The main risk, the report's authors write, is the market reaction to geopolitical and trade shocks. They note that an analysis of historical data shows that during periods of rising geopolitical tensions, banks systematically reduce their borrowing on wholesale markets, especially in foreign currencies. International funding becomes more expensive as investors—buyers of bank bonds and other instruments—become more risk-sensitive. The ESRB emphasizes that a prolonged period of uncertainty "could test banks' ability to absorb market-based wholesale funding," particularly for non-euro-denominated instruments.
"Empirical estimates suggest that a trade uncertainty shock leads to a decline in wholesale funding in US dollars and non-euro currencies by approximately 5 percentage points (pp)," the report states. Increased geopolitical risk and economic policy uncertainty are accompanied by a reduction in foreign currency borrowing by 2 and 6 pp, respectively. At the same time, the funding structure changes: bank bonds prove more resilient, while asset-backed securities, mortgage-backed securities, and short-term debt become more vulnerable. An additional channel of pressure is US economic policy: when uncertainty in the US increases, total lending at banks most exposed to the US economy declines by approximately 4.5%, while rates rise by an average of 90 basis points. A separate section of the report is devoted to the impact of the Russia-Ukraine conflict on the European banking system. The energy price shock following the outbreak of the conflict led to a slowdown in loan portfolio growth for all companies, but the effect was uneven: for non-energy-intensive firms, the decline was around 1%, while for energy-intensive firms, it was around 2.4%. At the same time, new lending flows, on the contrary, increased: by approximately 15% for non-energy-intensive companies and by 12.7% for energy-intensive ones. The ESRB attributes this to supportive measures, including guarantee schemes under the EU's temporary anti-crisis regime, which allowed banks to continue issuing loans despite the increased risks.
The European Systemic Risk Board is a pan-European macroprudential supervisory authority responsible for identifying, monitoring, and preventing systemic risks to the financial stability of the European Union.