By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Monday said that risks to European Union financial stability remained elevated despite the resilience shown by the EU economy and financial system.
In the foreword to the 2025 Annual Report of the European Systemic Risk Board (ESRB), which she chairs, Lagarde said the global environment during the review period was “exceptionally uncertain”, with geopolitical tensions, renewed trade frictions and heightened policy uncertainty shaping macro-financial conditions in the EU.
“Preserving this resilience remains vital, as risks to financial stability persist at elevated levels”, she said.
The report said financial stability risks in the EU remained elevated throughout 2025 and into early 2026, but that the financial system as a whole proved resilient.
The ESRB said trade frictions and geopolitical tensions had weighed on financial markets and the economy, with renewed tensions in the Middle East in early 2026 exacerbating downside risks to growth.
Despite global headwinds, financial and economic conditions in the EU remained fairly robust, supporting household and corporate balance sheets and resulting in limited credit losses for a well-capitalized and profitable banking system, the report said.
Non-bank financial institutions absorbed market volatility, and key financial infrastructures continued to operate smoothly despite heightened cyber and geopolitical risks, the ESRB said.
Looking ahead, adverse scenarios could challenge financial stability by amplifying existing vulnerabilities, the report said.
Escalating conflicts in the Middle East or deteriorating global risk sentiment could trigger “sharp and disorderly market corrections”, which could be transmitted to the real economy through weaker confidence and higher financing costs, it said.
Financial institutions could face greater funding and liquidity constraints, partly because of further potential interest-rate repricing, while subdued medium-term growth prospects, elevated public debt in some EU member states and rising security-related spending were limiting fiscal space and adding to debt-sustainability concerns, the ESRB said.
The ESRB said it had continued to monitor risks from non-bank financial intermediation, including persistent systemic liquidity risk, elevated leverage, growing concentration of exposures and cross-border linkages.
Lagarde said the ESRB General Board had agreed in June 2025 “to move towards a more holistic assessment of risks and vulnerabilities and to promote a system-wide approach to macroprudential policy.”
This included developing system-wide top-down stress-testing capability and integrating macroprudential-stance analysis into the ESRB’s regular assessments, she said.
The ESRB also adopted a recommendation on third-country multi-issuer stablecoin schemes, which Lagarde said had inherent vulnerabilities and generated clear financial-stability risks for the EU.
The report said the ESRB had called on the European Commission not to consider such schemes permissible under the current Markets in Crypto-Assets Regulation framework, or otherwise to develop safeguards to mitigate financial-stability risks.
The ESRB also said it had highlighted concerns about a European Commission proposal to allow insurance and reinsurance companies to provide unfunded guarantees under the framework for simple, transparent and standardized synthetic securitization.