EU watchdogs warn of rising risks from geopolitics and private finance

The European Supervisory Authorities—a collective body comprising the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA)—have issued a stark spring update warning that geopolitical tensions and private finance risks are intensifying vulnerabilities across the EU financial system.

The report, presented to the Financial Stability Table of the Economic and Financial Committee on March 19 and 20, 2026, highlights how ongoing conflicts, particularly the war in the Middle East, are shaping the financial outlook.

The authorities said that geopolitical tensions pose significant risks through higher energy prices, inflationary pressures and weaker economic growth, adding to an already uncertain environment.

They warned that elevated equity valuations and compressed bond spreads increase the risk of sudden repricing and reduced liquidity, which could amplify market volatility and trigger wider financial instability.

The report also stresses that higher interest rates and funding pressures could further tighten financial conditions and negatively affect asset quality across sectors.

Tensions around critical trade routes such as the Strait of Hormuz, along with airspace closures, are creating complex risks across multiple sectors, although insurers are expected to limit losses through war exclusions.

More broadly, geopolitical developments and cyber threats could disrupt critical infrastructure, including payment systems and financial services, raising systemic risks.

The authorities highlighted that interconnected global markets increase vulnerability, allowing shocks from outside the EU to spread quickly through cross-border financial links.

Currency volatility and capital shifts, driven by diverging monetary policies and trade disruptions, may also affect hedging strategies and international financing.

The report noted that private finance growth and opacity present emerging risks, particularly due to limited transparency, complex structures and strong interconnections with traditional financial institutions.

Private equity and private credit markets in the EU have expanded rapidly over the past 15 years, with assets under management reaching around €0.8 trillion and €0.1 trillion respectively by March 2025.

These markets remain smaller than those in the United States but are increasingly interconnected with banks through lending, funding and advisory activities.

The authorities warned that such interconnectedness raises the potential for contagion, especially as private finance is less regulated and often lacks detailed disclosure.

They pointed to recent developments in US private credit funds, where surges in redemption requests exposed vulnerabilities linked to shifts in investor sentiment, particularly as artificial intelligence disrupts traditional software business models.

These events demonstrated how liquidity pressures can emerge rapidly in semi-liquid structures, forcing funds to limit withdrawals or take extraordinary measures.

The report emphasised that private credit markets remain largely untested through a full economic cycle, increasing uncertainty about their resilience under stress.

At the same time, the authorities acknowledged that private finance can support economic growth by funding sectors such as technology, defence, healthcare and green investment.

Despite these risks, the report states that the EU financial sector remains resilient overall, with banks, insurers and pension funds maintaining strong capital and funding positions.

In the banking sector, capital ratios remain high, with the Common Equity Tier 1 ratio reaching 16.3 per cent and total capital ratios at 20.4 per cent, well above regulatory requirements.

Liquidity levels also remain robust, although banks have increased their exposure to sovereign assets, making them more sensitive to market volatility.

Asset quality remains stable, with non-performing loans at 1.8 per cent, although some risks persist in sectors such as commercial real estate and small and medium-sized enterprises.

The insurance and pension sectors have also demonstrated resilience, supported by strong solvency ratios and improved funding positions.

Profitability has remained solid due to high investment income and positive underwriting performance, while pension schemes have benefited from higher equity prices and rising interest rates.

However, the report warned that market volatility and global interconnectedness could still affect portfolios, particularly those with significant overseas exposure.

The authorities also highlighted broader market developments, noting that equity markets reached record highs before falling following geopolitical shocks, while energy prices rose sharply and gold hit new highs amid uncertainty.

Cryptocurrency markets have declined significantly since late 2025, although stablecoins have continued to grow, raising concerns about potential spillovers into traditional finance.

They cautioned that cybersecurity and digital risks are increasing due to growing reliance on technology providers, artificial intelligence systems and cloud infrastructure.

The report also underlined the risk of regulatory divergence between major economies, which could affect capital requirements and financial stability.

Given these challenges, the authorities called for heightened vigilance among supervisors and institutions, urging proactive risk assessments and stronger risk management frameworks.

They stressed the importance of incorporating geopolitical considerations into financial decision making and preparing for worst-case scenarios, including infrastructure disruptions and energy supply shocks.

Financial institutions were also urged to manage sovereign exposures cautiously, as rising public debt levels may create additional vulnerabilities.

The report highlighted the need for investors to exercise due diligence in private markets, given limited transparency and valuation uncertainties.

Supervisors were encouraged to monitor shifts in risk taking, particularly in light of upcoming regulatory changes such as the Solvency II review in 2027.

The authorities concluded that while the system remains broadly stable, financial stability risks remain elevated due to the combination of geopolitical uncertainty, market dynamics and evolving private finance structures.