European financial watchdogs have warned that the war in the Middle East and fast-growing private finance markets could increase risks for the EU financial system.
The European Supervisory Authorities — the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) — said geopolitical tensions could affect financial markets through higher energy prices, inflationary pressures and weaker economic growth, ESMA announced on Tuesday.
They said they had previously warned about the risk of sudden repricing and reduced liquidity when equity market valuations are elevated and bond market spreads are compressed, with the potential for volatility and revaluations.
Higher interest rates could further tighten funding conditions and affect asset quality.
Tensions around the Strait of Hormuz and airspace closures raise “multi-line” risks for insurers, although war exclusions are expected to limit net losses.
The authorities also said geopolitical events and cyber-attacks could cause shocks and disruptions to critical infrastructure.
Private finance in focus
The update also pointed to emerging risks in private finance, citing limited data, low transparency, long-running growth and complex links with the wider financial system.
Those factors can increase the potential for sudden shifts in investor liquidity and spillovers into other parts of the financial system, ESMA said.
It cited recent developments in some US private credit funds — which lend outside public bond markets — linked to artificial intelligence affecting more traditional software businesses, as an example of potential vulnerabilities tied to changes in investor sentiment.
Despite the risks, European financial markets have remained resilient, the update said, with the insurance sector and workplace pension schemes maintaining robust capital and funding positions.
In banking, capital ratios remain high and liquidity and asset quality are solid, while direct exposures to countries most affected by the war remain limited.
