The European Central Bank has issued a sharp warning to eurozone banks, urging them to prepare for a level of risk that goes beyond traditional economic cycles. According to the ECB, the financial system is now exposed to a combination of geopolitical tension, shifting trade policies, environmental disruptions and fast-moving technological changes that could reshape the landscape almost overnight.
Despite these concerns, the ECB notes that euro-area banks remain generally well-capitalized, supported by strong liquidity and the resilience demonstrated in stress tests. Still, the institution cautions that some banks may be overestimating their ability to release buffers during stress events, leaving them more exposed than they assume. The message is clear: capital strength should be preserved, not casually deployed.
One of the most pressing vulnerabilities highlighted is the reliance on U.S. dollar funding. Banks with significant dollar exposure could face liquidity strain if global market conditions tighten, especially during periods of volatility or sudden shifts in investor confidence. The ECB recommends that these institutions strengthen their buffers and diversify their liquidity sources to avoid being caught unprepared.
Beyond funding issues, the ECB points to the growing risks tied to inflated asset valuations, increased market concentration and the expanding connections between banks and non-bank financial institutions. These links could amplify shocks in unexpected ways. To reduce the impact of potential disruptions, the ECB calls on banks to tighten lending standards, modernize risk systems and adopt a more cautious posture as global uncertainties continue to build.
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