Rethinking geopolitical risks: Why Europe’s banks need their own understanding of risk
Recent years have shown that geopolitics is one of the most significant issues facing banks and building societies. The war in Ukraine, conflicts in the Middle East, sanctions, energy dependencies and supply bottlenecks have a direct impact on inflation, growth, capital markets and credit risks.
A recent working paper by the Bank for International Settlements (BIS)1 offers a remarkable insight into this:
Europe assesses and perceives geopolitical risks in a fundamentally different way to the US. It is precisely this that has so far led to significant misjudgements in economic analyses and risk models.
Europe’s perspective on geopolitical risks
To date, many established indicators of geopolitical risk have been based on Anglo-Saxon media sources; the well-known indices2 measure geopolitical tensions primarily on the basis of US and British newspapers.
The problem is:
This view significantly underestimates the economic impact on Europe.
The BIS authors have therefore developed, for the first time, a European geopolitical risk index (“EA-GPR”) based on media sources from Germany, France, Italy, Spain and the Netherlands. The result is clear: since the start of the war in Ukraine, the perceived geopolitical risk in the euro area has remained consistently significantly higher than in the US.
In particular, conflicts occurring in close geographical proximity have a much greater impact on European economies. The study implicitly refers to this as a “proximity penalty”: proximity creates greater economic vulnerability.
Geopolitical risks act like supply shocks
The macroeconomic impact of geopolitical events is particularly relevant for banks.
The BIS shows that
- geopolitical shocks reduce economic output
- whilst simultaneously driving up inflation;
- central banks respond by adopting a more restrictive monetary policy.
In this respect, geopolitical shocks are similar to classic supply shocks.
For banks and building societies, this means:
- rising refinancing costs,
- greater volatility in the capital markets,
- increasing credit risks in energy- and export-dependent sectors,
- greater uncertainty regarding investment decisions,
- mounting pressure on interest rate and liquidity management.
The study quantifies the specific impact of the war in Ukraine:
- industrial production in the eurozone is expected to be around 1 % lower,
- whilst price levels are expected to be around 0.6 % higher by mid-2022.3
Such macroeconomic shifts are particularly relevant for banks with large loan portfolios, treasury holdings or long-term interest rate positions.
Supply shortages are more important than sanctions
Another interesting finding from the study:
It is not sanctions that are the most significant economic mechanism through which geopolitical crises are transmitted, but supply shortages.
To this end, the authors analyse their own indicators of the severity of sanctions, supply chain disruptions and shortages.
The result:
Supply shortages account for a significant proportion of the inflationary impact of geopolitical crises, whilst sanctions themselves have only limited direct effects. This has an important implication for banks:
The real risks lie not so much in the policy decisions themselves, but in their impact on supply chains, energy supplies, production capacity, commodity prices and corporate liquidity.
What banks and building societies should be doing now
The study has clear implications for overall bank management.
1. Integrate geopolitics more closely into risk models
Many existing models underestimate geopolitical risks because they rely on global or US-centric data. Banks should therefore supplement these with European risk indicators, take greater account of regional interdependencies, and incorporate sector-specific supply chain risks.
2. Expand scenario analyses
Traditional stress scenarios will no longer suffice in future. It will be necessary to explicitly factor in energy price shocks, trade fragmentation, supply chain disruptions, longer-term inflation scenarios and ongoing geopolitical crises.
3. Reassess loan portfolios
For sectors that are particularly vulnerable (manufacturing, automotive, chemicals, energy-intensive companies, and export-dependent SMEs), geopolitical sensitivities will need to be given greater weight in rating and early-warning systems in future.
4. Strengthening strategic resilience
Geopolitical risks are not set to remain a temporary phenomenon. Banks therefore need: more resilient management models, greater adaptability, a better data foundation, and closer integration between risk, treasury and strategy functions.
The BIS study marks a significant shift in perspective:
Geopolitical risks are no longer exceptional external circumstances, but a structural feature of the European economic and financial system.
For banks and building societies, this means:
Geopolitics is becoming a permanent risk factor – comparable to interest rate, credit or liquidity risks.
That is why, as msg for banking, we not only support our clients in fully integrating geopolitical risks into their risk management processes, but also offer msg.GEO, a tool for generating scenarios, enabling our clients to navigate the coming years with resilience and the ability to make informed decisions.
Quellen
- 1. BIS, Geopolitical risk in the euro area: measurement and transmission, May 2026
- 2. e.g. Economic Policy Uncertainty Index (EPU) or Geopolitical Risk Index (GPR)
- 3. cp. 2021
