European Central Bank supervisor Claudia Buch has warned that financial markets are underpricing geopolitical risks, potentially leading to sudden market sell-offs. Speaking on Wednesday, Buch cautioned against the easing of bank regulations, particularly in light of increasing global tensions. Her comments were included in the ECB’s annual supervision report. She stated that current market indicators do not adequately reflect the existing financial stress.
Buch emphasised the importance of maintaining existing regulatory guardrails as geopolitical tensions rise. She argued that any fragmentation or weakening of these standards could undermine banks’ ability to withstand adverse developments. This comes as the U.S. has been loosening bank rules over the past year, creating potential pressure on regulators in other regions to follow suit to ensure a level playing field for their lenders.
While bank shares have experienced sell-offs following the start of conflicts, Buch noted that market movements have remained orderly. She acknowledged that lenders are currently well capitalised and possess necessary buffers. However, she also highlighted persistent risks, including stretched valuations in certain market segments, growing interconnections with non-bank financial firms, and the potential for sudden shifts in market sentiment.
The ECB has prioritised strengthening lenders’ resilience to geopolitical risks and plans to conduct stress tests on the largest banks in the coming months. These tests will assess the banks’ ability to withstand potential shocks and ensure their stability in an increasingly uncertain global environment.
