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Geopolitical risk and its implications for macroprudential policy

Author

Listed:
  • Behn, Markus
  • Lang, Jan Hannes
  • Reghezza, Alessio

Abstract

This article explores the link between geopolitical risk and bank solvency and discusses the potential implications for macroprudential policy. Drawing on 120 years of data, analysis reveals that heightened geopolitical risk has been associated with lower bank capitalisation over the past century. This effect can arise through multiple economic and financial channels, including reduced economic activity, surging inflation, increased sovereign risk, and shifts in capital flows and asset prices. However, the analysis also finds that the impact of geopolitical risk on bank solvency has been non-linear, with major geopolitical risk events having a much stronger effect than less major or more localised geopolitical shocks, with the effect being heterogenous across countries. Macroprudential policy and microprudential supervision play important and complementary roles in ensuring that banks are sufficiently prepared to absorb potential geopolitical shocks. While microprudential supervision ensures that geopolitical risk is factored into capital and liquidity planning, macroprudential capital buffer requirements can be released when shocks materialise, thereby supporting banks in absorbing losses while maintaining the provision of key financial services to the real economy. JEL Classification: G2, G15, F51

Suggested Citation

  • Behn, Markus & Lang, Jan Hannes & Reghezza, Alessio, 2025. "Geopolitical risk and its implications for macroprudential policy," Macroprudential Bulletin, European Central Bank, vol. 28.
  • Handle: RePEc:ecb:ecbmbu:2025:0028:1
    Note: 2203070
    as

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    More about this item

    Keywords

    Bank capitalisation; Financial stability; Geopolitical risk; Macroprudential policy;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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