The impact of geopolitical shocks on banks’ financial soundness in the Banking Union

Geopolitical tensions have emerged as a major source of macro-financial instability, with conflicts, sanctions, and global rivalries introducing risks that differ from traditional credit or market shocks. These events are difficult to anticipate and propagate through financial markets, the real economy, and operational channels, often amplifying into systemic consequences. Recent research shows that banks reallocate rather than withdraw—cutting cross-border lending but maintaining affiliate activity—while capital requirements calculated at consolidated level may transmit foreign shocks to domestic credit supply. Stronger capital buffers cushion these effects. Overall, major geopolitical shocks raise funding costs, weaken bank stability, and disrupt financial infrastructure, underscoring the need for robust governance, releasable buffers, scenario-based supervision, more coordinated micro and macro prudential regulation, and overall strengthened international coordination.