Geopolitical disruption is no longer a theoretical or background risk, according to the European Central Bank.

With tariffs rising, war ongoing in Ukraine and Gaza, and global liquidity at risk of politicisation, the ECB has warned that shocks of this kind now cut across every traditional banking risk category – and must be treated accordingly.

Speaking before the European Parliament on 15 July, ECB Supervisory Board Chair Claudia Buch outlined a shift in tone and expectation.

In 2026, the ECB will run a thematic stress test focused not on pre-defined macroeconomic scenarios, but on firm-specific geopolitical shocks. Each bank will be told the degree of capital depletion to model and must devise a realistic scenario that could cause it.

“In the 2026 thematic stress test exercise,” Buch said, “we will follow up on this year’s stress test by asking banks to assess which firm-specific geopolitical risk scenarios could severely impact their solvency.”

The approach signals a fundamental evolution in supervisory thinking. In place of hypothetical GDP shocks or interest rate hikes, banks must now account for prolonged war, trade breakdown, cyber attacks and political retaliation as direct, quantifiable threats to their capital base. For many firms, this will mean retooling internal models, stress assumptions and governance frameworks.

“It’s time for banks to challenge assumptions, rethink exposures, and build buffers that go beyond “business as usual.”

Irina Vasile, director, financial services risk management at EY, said on LinkedIn that the message is clear: “Geopolitical risk is no longer just background noise… It’s time for banks to challenge assumptions, rethink exposures, and build buffers that go beyond “business as usual.”

Fidel Farias, manager, financial services at BDO posted: ”The ECB’s decision not only updates the methodology of supervisory testing but also sends a clear message to supervised entities: the time has come to rigorously incorporate geopolitical disruption scenarios into strategic planning, capital management, and risk governance frameworks.”

Supervisors have already asked banks to assess their exposures to politically motivated disruption, from dollar liquidity to sanctions and foreign asset risk. Contingency planning and management oversight are expected to improve.

Warning signs

However, new cracks are starting to show in loan books. Stage 2 loans, which indicate a significant increase in credit risk, rose to nearly 10 percent by the end of 2024, up from 8.4 percent in 2020. The commercial real estate sector remains under pressure, with non-performing loan levels in this segment at 4.6 percent.

Buch noted that: “higher tariffs slow down trade and can have a negative impact on growth and the financial health of firms. While it is too early to see a deterioration in asset quality, credit risk and banks’ provisioning needs may increase.”

“Simplification should not weaken standards”

Alongside its shift in supervisory emphasis, the ECB is reforming how it oversees banks. The Supervisory Review and Evaluation Process (SREP) is being streamlined to make decisions faster and more proportionate, while capital approvals, model authorisations and reporting burdens are all under review. But Buch warned that the reforms will not compromise rigour.

“Simplification should not weaken standards,” she told MEPs. “Lowering resilience would be a dangerous road to go down. It would risk jeopardising the achievements made since the global financial crisis.”

The ECB is also calling for deeper European integration. Diverging national laws on governance, accounting and insolvency continue to impede supervisory consistency and cross-border business models. Buch warned that “the lack of an integrated banking market prevents banks from developing pan-European business models and strengthening their long-term profitability”.

What risk managers should do now:

• Begin internal planning for the 2026 stress test, including design of firm-specific scenarios linked to geopolitical disruption.
• Strengthen governance, data and modelling frameworks to integrate political risk into ICAAP, capital planning and contingency response.
• Review exposures in trade-linked sectors and commercial real estate, where early signs of stress are already visible.
• Prepare for faster, more digitalised supervisory interaction – and ensure internal systems can support timely, data-driven responses.
• Track developments in cross-border regulatory harmonisation and pan-European initiatives that could enable broader business models.