Euro zone banks must prepare to cope with geopolitical shocks

FRANKFURT, March 27 (Reuters) – Euro zone banks are resilient but need to be prepared to handle geopolitical shocks and macro-financial threats, European Central Bank supervisory chief Claudia Buch said on Thursday.

Policy reversals in some key areas by U.S. President Donald Trump’s administration have been unnerving financial markets in recent months, and policymakers are now assessing how this could affect growth, stability, and financial risk.

Key Concerns Highlighted by the ECB

This comes on top of financial and political stress created by Russia’s war in Ukraine and the Western sanctions that followed. ‘A potential deterioration in asset quality and possible economic disruptions caused by geopolitical conflicts or the effects of financial sanctions require heightened attention, sufficient capital and robust governance and risk management systems in banks,’ Buch said in a report.

Impact of Geopolitical Risks

Banks need to be prepared for cybersecurity threats and also need to address identified weaknesses in resilience and risk management, Buch said in the ECB’s annual report on supervisory activities.

Recommendations for Banks

Buch also called on lawmakers to make progress in approving a crisis management and deposit insurance framework to better deal with bank failures and protect depositors.

As geopolitical tensions and economic uncertainties persist, the ECB’s emphasis on robust risk management and governance systems underscores the critical need for preparedness in the banking sector.