ECB Financial Stability Review Pre-Release: Need to Monitor Geopolitical Risks to Safeguard Price Stability

14 May 2024

By Aurėja Bobelytė – VILNIUS (Econostream) – Policymakers need to monitor geopolitical risks to be able to mitigate its possible consequences to price stability, according to a Financial Stability Review pre-release published on Tuesday by the European Central Bank.

‘Assessing these [geopolitical] risks will enable policy authorities to enhance their ability to identify vulnerabilities, better understand how geopolitical events might propagate through the financial system and draw up possible policy responses in advance’, the ECB said. ‘This would facilitate a swift and coordinated policy response when needed and strengthen the overall resilience of the financial system.’

Financial institutions in turn ‘should regularly assess their resilience to geopolitical risk by carrying out dedicated and thorough assessments and stress tests’, the ECB said, adding that it would be also important to ‘develop robust contingency plans so that they can respond swiftly to unexpected events and minimise disruption to their operations.’

Using a proactive approach would allow those institutions to anticipate risks and adjust their strategies, the ECB noted.

Considering recent events, it was necessary to increase vigilance over a combination of factors that could lead to financial instability, because even if geopolitical events alone were unlikely to originate a systemic crisis, ‘they may act as a trigger for systemic distress if they interact with pre-existing vulnerabilities’, the ECB said.

‘Geopolitical risk could result in significant outflows and falling returns from investment funds, among other things. Equally, geopolitical risk could lead to declining bank stock prices, widening CDS spreads and greater funding costs and provisioning needs for banks, which in turn would weigh on their profitability’, the ECB said.