Against the backdrop of rising global geopolitical tensions and growing economic uncertainty, the European Central Bank (ECB) is intensifying its vigilance against possible risks to the eurozone’s financial system.
ECB supervisors have sharpened their focus on emerging risks such as tariffs and cyberattacks and a potential global shortage of dollars, five senior central bank officials said to Reuters.
This is a change of tone and orientation as the institution readies banks to contend with a fast-changing risk landscape.
The effort is being made as the ECB prepares for the next bank stress test in 2024, which will focus on lenders’ abilities to withstand geopolitical shocks.
In an era of higher inflation, which is further worsened by the war in Ukraine, the growing Russian threat, and trade fragmentation fears, the central bank has demanded that banks assess the economic fallout from global crisis shocks.
Stress testing geopolitical scenarios
Claudia Buch, chief ECB banking supervisor, revealed that the central bank will require banks to simulate geopolitical scenarios capable of drastically reducing their capital reserves for 2026.
These simulations are part of an effort to identify institutions that may be vulnerable to large-scale external shocks and ensure banks take preemptive steps.
The next stress tests come after months of increased surveillance from ECB supervisors.
According to some participants in the process, these worries are not new.
Since late 2024, the ECB has included geopolitical risks in its routine monitoring operations, assessing both banks’ exposure to conflict-affected regions and their operational presence abroad.
Banks have been advised to closely analyse their cross-border exposures, which include overseas operations and funding of international trade enterprises.
Regulators are particularly concerned about the possible impact of sanctions, trade tariffs, or unexpected changes in foreign policy on credit quality and capital buffers.
Cybersecurity risks in focus
At the same time, the ECB is attaching greater weight to cyber threats on its supervisory agenda, alongside geopolitical assessments.
Officials point to increasing concern over the risk of attacks from cybercriminals, with the Baltic states particularly affected by Russian-linked hacking groups in the past.
The ECB is carefully keeping an eye on the Bank as well as these high-risk locations are boosting digital defences and making plans for service disturbances.
Although no particular threats have been made public, ECB supervisors have urged institutions to ensure they have adequate incident response frameworks and be able to survive long-term outages.
While the bank is not yet mandating specific cybersecurity measures, it is signalling that cyber resilience has become an integral part of prudential supervision.
Prepare for a dollar liquidity crunch
Another big fear that has emerged is the possibility of a shortage of US dollars, which are critical for many European banks’ foreign transactions and financing operations.
The ECB has asked banks to assess how they would react if access to dollar finance were substantially restricted, for example, if the US Federal Reserve unwinds emergency liquidity arrangements.
As previously reported, the central bank highlighted the issue with banks as part of a broader assessment of liquidity issues.
Supervisors encourage institutions to consider contingency financing plans and alternate sources of liquidity, but they do not advocate any rapid changes in strategy or funding mix.
Focus on internal risk controls
However, ECB supervisors would not at this stage be demanding banks to cut their exposures or reshuffle their portfolios. Instead, it is about being prepared and managing risks within.
This is to push banks to reinforce their oversight systems and do strong scenario planning.
Two of the main regulatory processes where this risk-centric approach is being integrated are the SREP, Supervisory Review and Evaluation Process (done on an annual basis), and the ILAAP, Internal Liquidity Adequacy Assessment Process.
Combined, these assessments enable supervisors to assess the extent to which banks understand their risk profiles and their preparedness to manage funding and capital disruption.
The ECB’s increased vigilance reflects a growing realisation that today’s financial system is inextricably linked to global political and technical trends.
The vulnerabilities that Europe’s banks face have expanded beyond typical credit and market problems to include currency imbalances and cyber warfare.
As banks prepare for an increasingly unpredictable and volatile global environment, the ECB sends a clear message: risk awareness and readiness are no longer optional—they are now critical pillars of financial stability.
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