In the Focus of Supervision: Geopolitical Risks

Geopolitical risks are among the central focus areas of banking supervision in 2026. They pose an immediate threat to banks’ business models, capital adequacy and operational stability and therefore rank high on the supervisory agenda.

Accordingly, the expectations of the Federal Financial Supervisory Authority ¹ (BaFin), the European Central Bank² (ECB) and the Single Supervisory Mechanism³ (SSM) are correspondingly are explicit:

For decision-makers, this leaves little room for doubt: geopolitics is no longer a peripheral topic, but a core element of overall bank management.

Geopolitical risks as a core strategic risk

Supervisory attention to geopolitical risks reflects their distinctive mode of impact. These risks do not materialise in isolation; instead, they simultaneously affect credit, market, liquidity and operational risks. Geopolitical conflicts, sanctions, fragmentation of global trade and the formation of political blocs can place sudden pressure on established business models.

Against this background, BaFin classifies geopolitical risks as a structural trend with long-term implications for financial system stability. Similarly, the ECB emphasises in its financial stability analysis that geopolitical tensions can trigger shocks that spread rapidly and broadly across markets and supply chains.

The implication is clear: geopolitical risks lead to persistently higher uncertainty at a systemic level, requiring banks to align their risk management frameworks accordingly.

A world in transition

Geopolitical risks manifest in a wide range of forms, from armed conflicts and increasing political and economic fragmentation to trade and customs disputes.

Over recent years, both the frequency and intensity of these risk dimensions have increased significantly, and they often materialise simultaneously.

This development is not merely a matter of perception; it is clearly supported by relevant indicators and empirical evidence.

The simultaneous increase across all three indices highlights the need for banks to prepare for a persistently elevated and highly interconnected environment of uncertainty. The GPR Index measures the risk of armed conflict (war and terrorism), the EPU captures political and economic uncertainty, and the TPU reflects uncertainty stemming from trade and customs conflicts.

Supervisory expectations for banks

Supervisory expectations are clearly defined. The SSM requires institutions to explicitly integrate geopolitical risks into their governance structures, risk strategies and ICAAP and ILAAP processes. The objective is to ensure a consistent anchoring of geopolitical risks across all levels of management.

This integration must be reflected concretely in key management instruments. In particular, this includes:

• incorporating geopolitical scenarios into stress testing frameworks,
• adjusting limit systems and early warning indicators,
• conducting transparent exposure analyses by country and sector,
• systematically considering sanctions and trade restrictions, and
• specifically strengthening operational resilience.

In addition, the ECB highlights the importance of second-round effects. Institutions are expected to analyse how geopolitical events indirectly affect their risk profiles, for example through persistently higher energy prices or the impact of sanctions on counterparties and supply chains. Such considerations form an integral part of strategic planning.

Geopolitical risks affect the financial system through multiple transmission channels

Against this backdrop, the ECB has identified several transmission channels (see also Figure 2) through which geopolitical risks affect the financial system:

For risk managers, this leads to a central implication: a single geopolitical shock does not affect only one portfolio or risk category, but typically unfolds across multiple risk classes at the same time, often with mutually reinforcing effects.

Geopolitical risks and business models

This multidimensional impact explains why BaFin assigns particular relevance to geopolitical risks when assessing business models. Institutions with a strong international orientation, regional or sectoral concentrations, or dependencies on specific supply chains or IT service providers are particularly exposed.

This does not only apply to large corporates, but also to export-oriented SMEs, whose business models may come under significant pressure, for example due to high customs duties in key sales markets.

Executive boards are therefore required to explicitly incorporate geopolitical risks into their strategic considerations. Key questions include:

• What is the institution’s exposure to geopolitically sensitive regions?
• How resilient are supply chains and IT service providers?
• Which geopolitical scenarios are reflected in ICAAP and ILAAP processes?

Supervisory expectations are unambiguous: institutions that merely describe geopolitical risks qualitatively or address them in isolation do not meet regulatory requirements. What is required is an integrated, quantifiable and strategically embedded approach to a risk driver that affects business models, risk profiles and management frameworks alike.

Fragmentation of the global economy as a structural trend

Rising geo-economic fragmentation represents one of the key structural manifestations of geopolitical risk. Trade blocs are being reshaped, supply chains increasingly regionalised, and strategic industries progressively decoupled.

This has significant implications for banks. Fragmentation reduces efficiency, increases costs and leads to lasting changes in capital and trade flows. It is also associated with an environment of persistently higher volatility. The ECB notes that such structural shifts can influence not only growth prospects, but also inflation dynamics and interest rate levels on a sustained basis.

Geopolitical risks should therefore not be viewed as temporary shocks, but as structural features of the environment that shape the framework conditions for business models and risk management over the long term.

Operational resilience and cyber risks

These structural shifts affect not only markets and business models, but are also accompanied by an increase in cyber risks, particularly from state-sponsored or politically motivated attacks. Payment systems, cloud service providers and financial market infrastructures are increasingly becoming targets.

Against this backdrop, the SSM calls for a substantial strengthening of operational resilience. This includes robust contingency planning, regular testing and close monitoring of critical third-party providers.

A standard business continuity management approach alone is no longer sufficient. Geopolitical risks require dedicated scenarios that explicitly take into account political escalation, state intervention and coordinated cyber attacks, and that are integrated into resilience and crisis management planning.

Governance: Responsibility at board level

Supervisory authorities explicitly address banks’ management bodies. Executive boards are expected to actively discuss geopolitical scenarios, regularly review risk appetite, assess strategic diversification options and ensure adequate information flows. Decision-making processes must be clearly documented and supported by robust management and control mechanisms.

The core message is unequivocal: geopolitical risks are a top-management issue. Supervisors expect executive boards to take responsibility and to anchor geopolitical developments visibly, consistently and effectively within the bank’s management framework.

Conclusion

BaFin and the ECB have clearly identified geopolitical risks as a high-priority trend topic. Their effects are systemic, structural and multifactorial. Accordingly, they must be managed in an integrated and consistent manner.

The central question is therefore no longer whether geopolitical risks are relevant, but rather: Is your organisation geopolitically resilient?

The answer to this question has a direct bearing on competitiveness, supervisory assessment and long-term stability.

Institutions that proactively analyse geopolitical risks, develop robust scenarios and strengthen governance structures not only meet regulatory expectations – they also safeguard their strategic ability to act in an increasingly fragmented world.