FRANKFURT, March 18 (Reuters) – Financial markets are underestimating geopolitical risks, increasing the potential for sudden sell-offs, warned Claudia Buch, Chair of the European Central Bank’s (ECB) Supervisory Board, on Wednesday. She also cautioned against loosening banking regulations.
The United States has been easing its banking regulations over the past year, creating pressure on regulators in other countries. Other institutions could face uneven playing fields if they do not follow suit.
“It is essential to maintain these safeguards in the face of rising geopolitical tensions,” Buch said in the ECB’s annual supervisory report.
“Any fragmentation or weakening of standards could compromise banks’ ability to withstand adverse developments,” she added.
Banking sector stocks have been impacted by the start of the conflict in Iran in late February, but market fluctuations have remained moderate, mirroring a similar pattern last year when tariffs and conflicts increased uncertainty.
Buch noted that banks are currently well-capitalized and hold sufficient reserves, but risks remain elevated.
“This uncertainty is not sufficiently reflected by market-based financial stress indicators, which could lead to a brutal reassessment of risk,” she cautioned.
The head of the Frankfurt-based institute’s supervisory board also highlighted that disruptions could occur unexpectedly and spread rapidly, given geopolitical tensions, high valuations in certain market segments, increasing interconnections with non-bank financial institutions, and the risk of sudden shifts in market sentiment.
The ECB, which has prioritized strengthening the sector’s resilience to geopolitical risks this year, will subject the largest banks in the bloc to stress tests in the coming months.
(Balazs Koranyi; version française Diana Mandiá, édité par Augustin Turpin)
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