The report examines the risks and vulnerabilities in the EU financial system against a backdrop of geopolitical tensions and structural changes. Growth forecasts have been revised downwards due to uncertainty related to trade policies, particularly those of the United States. The report advises financial institutions to integrate these risk considerations into their daily operations and to prepare for various…
This joint autumn 2025 report, published by the European Banking Authority (EBA), analyzes risks and vulnerabilities in the European Union's financial system. It covers themes such as geopolitical risks, global trade policies, sectoral impacts, cyber-risks, and expenditure developments, notably in defense. The scope includes banking, insurance, investment funds, and pensions sectors, with analysis of data up to mid-2025, relying on international and European economic data and projections (p. 1-17).
The report addresses growing risks in the European financial system linked to geopolitical developments and rapid changes in global trade policies, notably massive and sudden US tariffs. These measures increased uncertainty, caused market corrections, and weighed on growth prospects, with downward revisions of IMF and European Commission forecasts for 2025-2026. Despite this volatility, the European banking sector showed notable resilience, with stable profitability (RoE 10.5% end 2024) and high capital ratios (CET1 at 16%). However, a moderate deterioration in asset quality is observed, notably in commercial real estate. Bond and equity markets experienced tensions, with strong volatility related to tariff announcements and geopolitical conflicts, notably in the Middle East and Ukraine. The report also highlights the EU's critical dependence on non-European, mainly US, infrastructures and providers, increasing vulnerability to external risks. Cyber-risks are intensifying, with an increase in sophisticated attacks, requiring rigorous implementation of the DORA framework. The crypto-asset sector, although limited in contagion, must be monitored due to its growing links with traditional finance. The increase in European defense spending, notably the "Readiness 2030" initiative and increased German borrowing, has boosted defense equity markets but poses challenges in managing interest rate and liquidity risks for insurers. The report recommends that financial institutions and authorities strengthen geopolitical risk management, adopt appropriate stress test scenarios, monitor cyber-risks, and ensure market infrastructure stability, while continuing efforts towards greater European autonomy and robust supervision of structural financial sector developments (p. 2-3, 16-17).
This report was prepared to assess risks and vulnerabilities of the European financial system in a context marked by increased geopolitical tensions, notably the war in Ukraine and conflicts in the Middle East, as well as rapid changes in global trade policies, notably US tariffs. The objective is to identify impacts on various financial sectors (banks, insurance, funds, pensions), analyze the consequences of geopolitical and economic developments on financial stability, and formulate recommendations to strengthen system resilience. The scope covers data up to mid-2025, with particular attention to the effects of US tariffs, increased defense spending in Europe, cyber-risks, and dependencies on non-European infrastructures. The report aims to inform supervisory authorities, financial institutions, and market participants (p. 1-3).
Geopolitical and economic risks: Geopolitical tensions, including the war in Ukraine and conflicts in the Middle East, as well as US tariff measures, have generated strong financial market volatility, a downward revision of global growth forecasts (2.8% in 2025 according to the IMF), and tightening credit conditions, notably on high-yield bonds (p. 2-3, 7-9).
Banking sector resilience: Despite a difficult context, European banks maintained high profitability (RoE 10.5% end 2024) and solid capital ratios (CET1 at 16%). Asset quality slightly deteriorated, with a moderate increase in non-performing loans, especially in commercial real estate. Loans to households and businesses increased, but credit standards remain strict, notably for companies (p. 3-4).
Insurance and pensions sector: The insurance sector showed good resilience, with improved profitability driven by investment income. The 2024 stress tests confirm capital strength under severe geopolitical scenarios. The pensions sector (IORP) remains stable but faces operational challenges linked to the transition from defined benefit to defined contribution schemes, altering investment strategies and associated risks (p. 4-5).
Investment funds: Funds experienced strong volatility in 2025, notably alternative and commodity funds. Net flows were overall moderate, with outflows from equity and bond funds in the second quarter. Withdrawal operations related to April volatility were generally orderly, limiting systemic risks (p. 5-6).
Dependence on non-European infrastructures: The EU heavily depends on US-based market infrastructures and IT providers, notably in derivatives clearing (98% of euro products cleared by two US CCPs), rating agencies (73% of European securities rated by US agencies), and cloud providers (63% of the market held by three US firms). This dependence increases the European financial system's vulnerability to external shocks and highlights the need for greater autonomy (p. 6-7).
Impact of US tariffs: US tariff announcements caused marked declines in equity markets (-20% in some sectors), strong bond market volatility, and dollar depreciation. Manufacturing, pharmaceutical, automotive, and metallurgical sectors are most exposed. European banks are indirectly affected through loans to exporting companies, with increased risk of asset deterioration and reduced credit demand. Insurers face indirect impacts via their investments and market volatility, as well as increased risks on trade-related insurance and claims inflation (p. 7-12).
Cyber-risks and digitalization: Cyberattacks, notably DDoS and ransomware, are increasing in frequency and sophistication, amplified by geopolitical tensions. The financial sector is a prime target, with major operational risks. The implementation of the Digital Operational Resilience Act (DORA) since January 2025 is crucial to strengthen resilience. Artificial intelligence changes the cyber-risk landscape, both as an attack vector and defense tool. Despite a capitalization decline in 2025, crypto-assets present growing risks linked to their integration with traditional finance (p. 13-14).
Increase in defense spending: The "Readiness 2030" initiative plans €800 billion in defense spending, with a notable impact on financial markets. Defense company equities rose 30% early 2025, while European bond yields experienced strong volatility linked to public borrowing. Insurers face risks related to interest rate variations and margin calls on derivatives. The spending increase requires sufficient budgetary space to avoid fiscal tensions and sovereign risk increases (p. 15-16).
- Established facts:
- The European banking sector maintained high profitability (RoE 10.5%) and solid capital (CET1 16%) at end 2024, despite slight asset quality deterioration (NPL 1.9%) (p. 3).
- Financial markets experienced strong volatility linked to US tariff announcements and geopolitical conflicts, with marked sectoral declines (up to -20%) (p. 7-9).
- The EU is heavily dependent on non-European, notably US, market infrastructures and IT providers, increasing external vulnerability (p. 6-7).
- Cyberattacks are increasing in frequency and sophistication, with growing impact on financial stability (p. 13-14).
- Assumptions:
- The adverse scenario of the 2025 EBA stress test includes a hypothetical worsening of geopolitical tensions with lasting negative impacts on consumption and investment (p. 11).
- The economic impact of US tariffs is estimated as a eurozone GDP reduction of 0.3 to 0.5 points in case of retaliation (p. 9).
- Interpretations:
- The current resilience of the European financial system is solid but could be tested in case of escalation of tensions or new tariff measures.
- Dependence on non-European infrastructures constitutes a strategic risk requiring political response.
- Cyber-risks and digitalization are major operational and systemic vectors, requiring increased vigilance.
- Uncertainties:
- The evolution of geopolitical conflicts (Ukraine, Middle East) remains unpredictable and may cause sudden shocks.
- Future US decisions on tariffs are uncertain and may substantially alter economic prospects.
- The medium-term impact of increased defense spending on financial stability will depend on budget management and markets (p. 2-3, 7-17).
The report concludes that the European financial system faces significant risks linked to geopolitical uncertainties and rapid changes in global trade policies. Despite demonstrated resilience, notably in banking and insurance sectors, vulnerabilities exist, notably through exposures to sectors sensitive to US tariffs and dependence on non-European infrastructures. Cyber-risks constitute a growing threat that must be managed proactively. The increase in defense spending in Europe influences financial markets and poses challenges in managing interest rate and liquidity risks. The report recommends:
- Systematically integrating geopolitical risks into daily risk management processes of financial institutions.
- Strengthening risk management capacities, notably through stress tests and scenario analyses adapted to geopolitical and trade shocks.
- Closely monitoring cyber-risks and promptly implementing the DORA framework.
- Tracking developments in crypto-asset markets and their interconnections with traditional finance.
- Promoting greater European autonomy in financial infrastructures and critical services.
- Maintaining solid capital buffers to absorb shocks and support confidence and real economy financing.
These measures are essential to ensure the stability and robustness of the European financial system in an uncertain global context (p. 2, 16-17).
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