ESAs Flag Geopolitical & Private Finance Risks In Spring Update

The European Supervisory Authorities (EBA, EIOPA and ESMA) have published their Spring 2026 Joint Committee risk update, highlighting mounting geopolitical pressures and emerging vulnerabilities in private finance markets, while reaffirming the overall resilience of the EU financial system.

The update underscores the growing impact of geopolitical instability, particularly the ongoing conflict in the Middle East, as a key driver of financial risk. The ESAs point to transmission channels including elevated energy prices, inflationary pressures and weaker global growth. They also caution that current market conditions, characterised by high equity valuations and compressed bond spreads, increase the risk of sudden repricing events and liquidity stress, potentially amplifying volatility across asset classes.

Heightened interest rates are identified as an additional pressure point, tightening funding conditions and posing risks to asset quality. The ESAs further highlight operational and systemic threats linked to geopolitical developments, including cyber attacks and disruptions to critical infrastructure. While war exclusions are expected to mitigate direct insurance losses, multi line risk exposures remain relevant, particularly in regions affected by tensions such as the Strait of Hormuz.

A central focus of the update is the rapid expansion of private finance markets. The ESAs warn that limited transparency, sparse data and complex interconnections with the wider financial system heighten the risk of abrupt market adjustments. These vulnerabilities are compounded by shifting investor sentiment, with recent developments in certain US private credit funds, linked to structural changes in technology sectors such as artificial intelligence, illustrating how quickly risk profiles can evolve.

Despite these risks, the ESAs confirm that the EU financial sector remains broadly resilient. Banks continue to report strong capital ratios, solid liquidity positions and stable asset quality, while insurers and institutions for occupational retirement provision maintain robust capital and funding buffers. Direct exposures to regions most affected by geopolitical conflict remain limited, reducing immediate contagion risks.

However, the Joint Committee emphasises the need for continued vigilance. Supervisors and market participants are urged to enhance risk assessments, incorporate geopolitical factors into risk management frameworks and closely monitor indirect exposures, particularly those linked to energy markets and vulnerable sectors. The ESAs also stress the importance of actively managing risks in private markets, especially in light of evolving regulatory frameworks such as the upcoming Solvency II 2027 changes.

Overall, the update reflects a financial system that remains stable but increasingly exposed to external shocks and structural market shifts, requiring proactive supervision and risk management to sustain resilience.

Read the press release here.