Joint Committee Update on risks and vulnerabilities in the EU financial system - Spring 2026

General Information

This document is a report entitled “Joint Committee Update on risks and vulnerabilities in the EU financial system - Spring 2026,” published by the European Banking Authority (EBA) in March 2026. It is a semi-annual update produced by the Joint Committee of European Supervisory Authorities (EBA, EIOPA, ESMA) in collaboration with the European Systemic Risk Board (ESRB). The report covers cross-sectoral risks and vulnerabilities in the European Union financial system, focusing on current geopolitical risks and the development of private finance. The scope includes the banking, insurance, investment funds, and pensions sectors, over the recent period up to the first quarter of 2026.

Executive Summary

The report analyzes major risks and vulnerabilities affecting the EU financial system in spring 2026, emphasizing two key themes: geopolitical risks and the growth of private finance. Geopolitical risks, notably the war in Iran, maintain high uncertainty, causing energy price increases, anticipated inflation, and economic slowdown. These tensions generate liquidity risks, asset quality risks, as well as cyber and infrastructure threats. The strong interconnection of European financial markets with third countries, notably via non-EEA investments, increases vulnerability to external shocks. Furthermore, private finance (private equity and private credit funds) is growing rapidly in the EU, though more moderately than in the United States, with close links between these funds and European banks. This expansion raises risks related to illiquidity, complexity, lack of transparency, and absence of full-cycle testing, as illustrated by recent tensions on US semi-liquid funds. Despite overall resilience of banking, insurance, and fund sectors, pressures on profitability, asset quality, and sovereign exposure management remain concerning. The report concludes by recommending financial institutions and authorities to strengthen geopolitical risk management, closely monitor exposures to private finance, and prepare for stress scenarios including cyberattacks and technological disruptions.

Context and Objectives

This report was prepared within the framework of the Joint Committee of European Supervisory Authorities (ESAs) to provide a cross-sectoral assessment of risks and vulnerabilities in the European financial system. The objective is to inform the Economic and Financial Committee - Financial Stability Table (EFC-FST) on recent developments, particularly geopolitical risks exacerbated by the war in Iran and international tensions, as well as dynamics in private finance, a rapidly expanding sector. The document aims to identify potential threats to financial stability, analyze exposures of various sectors, and formulate recommendations for risk management and supervision. The scope covers banking, insurance, investment funds, and pensions sectors, with particular attention to cross-border interactions and emerging risks. Limitations notably concern the difficulty of precisely assessing certain risks related to private finance, which is poorly transparent, and rapidly evolving geopolitical uncertainties.

Summary of Key Points by Theme

Geopolitical risks: The war in Iran is the main uncertainty factor, causing energy price increases, anticipated inflation, and economic slowdown. These tensions generate liquidity risks, asset quality risks, as well as cyber and critical infrastructure threats. European banks and insurers are exposed via their non-EEA investments (about 13% for insurers) and their links with foreign counterparties, notably in the United States. Currency volatility, especially of the euro against the dollar and emerging market currencies, increases exchange rate and funding risks. The interconnection of European financial markets with third-country markets amplifies shock transmission. Regulatory divergence, notably with the United States, could exacerbate vulnerabilities. (pp. 4-6, 12-14)

Growth of private finance: Private equity and private credit funds have experienced average annual growth of 14% and 18% respectively since 2010, reaching €0.8 and €0.1 trillion in 2025. These funds are strongly interconnected among themselves and with banks, via direct financing, vehicle sponsorship, derivatives, and advisory functions. This expansion is accompanied by risks related to illiquidity, contractual complexity, lack of transparency, and absence of full economic cycle testing. Recent tensions on US semi-liquid funds revealed vulnerabilities, notably massive redemption requests linked to sectoral impacts (e.g., AI on software). European insurers and pension funds have limited but increasing exposures to these assets. (pp. 6, 15-16)

Evolution of European financial sectors: Banks show high profitability (RoE 10.7% Q3 2025) and solid capital ratios (CET1 16.3%), with stable asset quality but pockets of risk in SME loans and commercial real estate. Insurers and pension funds demonstrate resilience with solid solvency ratios and improved equity, although growing exposure to alternative assets and non-EEA markets increases vulnerability. European equity markets reached record levels before the war in Iran, followed by corrections. Bond markets see rising sovereign yields and spread compression. Investment funds remain overall resilient despite volatility. (pp. 9-11)

Main Findings and Lessons

Established facts: The war in Iran and other geopolitical tensions maintain high uncertainty, impacting energy prices, market volatility, and financial asset quality. European banks have solid capital and liquidity ratios but must monitor risk pockets in certain loans. Insurers and pension funds are overall resilient but exposed to growing risks related to alternative assets and non-EEA markets. Private finance has grown rapidly, with significant bank exposures and a trend of increasing exposures by insurers and IORPs. (pp. 4-6, 9-11, 15-16)

Assumptions: Geopolitical tensions could lead to stock market corrections, spread increases, and heightened liquidity risks. Private finance, untested over a full cycle, could reveal vulnerabilities in prolonged stress. Regulatory divergence could increase systemic risks. (pp. 12-14, 16)

Interpretations: The interconnection of European markets with third countries amplifies transmission of geopolitical shocks. The growth of private finance, while offering diversification and financing benefits, introduces new complex and opaque risks. (pp. 5-6, 15-16)

Uncertainties: The evolution of geopolitical conflicts, financial market reactions, impact of regulatory adjustments (Solvency II 2027) on insurance portfolios, and institutions’ capacity to manage cyber and technological risks remain uncertain. (pp. 13, 17)

Conclusions and Recommendations

The report recommends that authorities and financial institutions actively prepare for geopolitical risks through thorough scenario analyses, integrating impacts on exposures, capital, liquidity, business models, and operational resilience. It highlights the need for prudent management of sovereign exposures amid rising public debts. Institutions must formalize the integration of geopolitical risks into their management frameworks, including governance, due diligence, and operational planning for extreme scenarios, notably critical infrastructure disruptions. Regarding private finance, investors are urged to strengthen their due diligence given lack of transparency and valuation risks. Banks and supervisors must improve understanding, monitoring, and management of exposures to non-bank entities and private finance, especially regarding third-country counterparties. Insurance supervisors should closely monitor risk profile changes induced by the 2027 Solvency II revision, which could lead to significant asset reallocations. (pp. 7, 17)