Europe’s top financial supervisors have published their latest assessment of risks in the region’s banking and capital markets, highlighting how trade disputes, higher government spending on defence, and growing digital vulnerabilities are combining to test the system’s resilience. The joint report by the European Banking Authority, the insurance and pensions regulator, and the markets watchdog concludes that while the sector has weathered recent turbulence, weak points are emerging that could surface quickly if conditions turn. One source of concern is global trade. Earlier this year, abrupt tariff announcements from the United States sent equity markets tumbling, bond yields higher, and credit spreads wider before stabilising again. The watchdogs note that Europe’s manufacturing sector, which relies heavily on exports, could face knock-on effects if protectionist measures escalate further. Banks with large exposures to industrial lending could be especially vulnerable. Another pressure point is fiscal. European governments are committing to higher defence spending, raising questions about how the additional borrowing will be absorbed by bond markets. When German yields jumped in March after new funding pledges, life insurers and pension funds saw sharp swings in the value of their portfolios. If borrowing costs climb again, these institutions could face fresh liquidity demands and policyholder pressure. Digital security features prominently in the report. Regulators say that firms must act quickly to implement new EU rules on technology and cyber risk, warning that reliance on a small number of third-party providers leaves the system exposed. They cite the possibility that a single failure or attack could ripple across money markets or settlement systems, even if only temporarily. The supervisors also urge progress on longer-term projects to deepen Europe’s financial architecture. They call for a completed banking union, better integration of capital markets, and more oversight of investment funds and other non-bank institutions, which continue to gain ground as investors seek alternatives to traditional assets. Europe’s reliance on infrastructure and services outside the bloc—from clearing houses to cloud providers—is also flagged as a strategic vulnerability in an era of geopolitical fragmentation. Reactions from analysts and trade press generally echo the tone of caution. Commentators agree that policymakers need to prepare for sudden swings in market sentiment, especially around trade or fiscal shocks, and that firms should rehearse how they would cope with abrupt shifts in funding or asset prices. Rating agencies have already warned that increased defence budgets could strain government balance sheets, while central bankers stress that valuations may not fully capture geopolitical uncertainty. On digital resilience, some market practitioners welcome the EU’s new rules but argue that limiting the number of providers formally classified as “critical” could leave gaps in protection. Civil society groups, meanwhile, have questioned whether promoting defence-related investment risks diluting the bloc’s sustainability ambitions. The report’s central message is that the European financial system remains stable for now, but that stability depends on institutions taking proactive steps. Supervisors want banks, insurers, and funds to test their liquidity under stress scenarios, to move faster on cyber-preparedness, and to be realistic about the potential impact of sudden policy shifts. With global politics unsettled and markets prone to sharp swings, the real test will be how well Europe’s financial sector can turn this guidance into concrete action. Source: CMS