The European Central Bank warned in its latest Financial Stability Review that the outbreak of war in early 2026 poses a serious challenge to financial stability in the euro area. Although economic growth surprised to the upside from late 2025 to early 2026 and financial market sentiment remained broadly strong, the Middle East conflict has disrupted global energy and commodity supplies, pushed up energy prices, and intensified inflationary pressures. As the conflict persists, its impact on the global economy and financial stability is becoming increasingly severe.
The adjustment in financial markets, while broad, has so far been orderly. However, by historical standards, asset prices remain elevated, especially given the current geopolitical and economic pressures, leaving markets vulnerable to sharp repricing. Non-bank financial institutions could amplify shocks during market volatility, particularly open-ended corporate bond funds, which have limited liquidity buffers. In addition, pressures in U.S. private markets could spill over to the euro area, although they do not yet pose a systemic concern.
On the banking side, euro area banks have benefited from improved capital and liquidity buffers over the past decade and from stronger profitability in recent years. Nevertheless, many banks face risks: although direct exposure to the Middle East is limited, the war could affect energy-intensive and trade-dependent industries through second-round effects. Cost-of-living pressures could weaken household finances, which in turn could affect the asset quality of consumer credit and mortgages. In several highly indebted euro area countries, coping with the shock of the war and higher defense spending could further strain public finances.
This review includes four special studies: using artificial intelligence tools to explore financial stability sentiment; analyzing the divergence between rising corporate bankruptcy rates and subdued non-performing loan ratios; assessing the impact of macroprudential policies on household credit and house prices; and evaluating the implications of stress in global private credit markets for euro area financial stability.
In the foreword, ECB Vice-President Luis de Guindos stressed that geopolitical risks, non-bank financial vulnerabilities, and sovereign debt sustainability concerns are intertwined and could materialize simultaneously and amplify one another, thereby increasing financial stability risks.