ECB warns of systemic risks despite limited bank exposure to war

The European Central Bank has said that eurozone banks currently face limited direct exposure to the conflict in the Middle East, although broader systemic risks could still emerge through interconnected vulnerabilities in the financial system.

Speaking to Reuters, ECB Vice President Luis de Guindos said financial markets are experiencing stress as a result of the war involving the United States and Israel against Iran. However, he noted that the sell-off in assets outside the region has so far remained limited.

“Direct banking risks are limited, and the banking system is well prepared: high profitability, strong capital and liquidity,” de Guindos said.

He added that key market infrastructure operators, including central counterparties in energy markets, have so far been able to meet margin requirements despite heightened volatility.

At the same time, de Guindos warned of the potential for a chain reaction stemming from interconnected weaknesses within the financial system. According to him, the conflict could weaken market sentiment, trigger a reassessment of risks for highly leveraged borrowers and sovereign issuers, and intensify stress in the non-bank financial sector.

Addressing inflation, he said the conflict could both slow economic growth and push inflation higher. Despite these risks, the ECB remains committed to its medium-term objective of stabilising inflation at 2 per cent.

By Tamilla Hasanova