ECB warns Middle East war-driven energy shock heightens euro-area financial stability risks

Financial stability risks in the euro area remain elevated as the war in the Middle East triggers an energy-supply shock that could lift inflation, weaken growth, increase market volatility and make debt harder to service, the European Central Bank said Wednesday in its May 2026 Financial Stability Review.

The ECB said the main immediate threat is a major geoeconomic shock linked to the war, even though euro-area banks’ direct exposures to the Middle East are small — about 0.6% of total assets and concentrated in a handful of lenders. The bigger concern, according to the review and an accompanying press release published May 27, is that a prolonged shock could spread indirectly through energy- and trade-sensitive companies, households and governments.

“The current energy supply shock poses upside risks to inflation and downside risks to economic growth. It could also increase market volatility and challenge debt servicing capacities as financing costs rise in an environment of weaker economic growth,” ECB Vice-President Luis de Guindos said in the press release.

The central bank said the shock is being transmitted through attacks on energy infrastructure, disruption to shipping through the Strait of Hormuz, sharp rises in oil and gas prices, and stress in refined petroleum products including jet fuel and diesel. Those developments, the review said, have increased the likelihood of persistent global energy-supply disruptions.

The euro area is particularly sensitive because gas reserves were at historically low post-winter levels when the shock hit, the ECB said. It also stressed that the severity and duration of the fallout remain uncertain, framing the review as a risk assessment rather than a prediction of crisis.

While banks appear better placed than in earlier stress episodes, the ECB pointed to non-bank financial institutions as a more important channel through which turmoil could spread. Asset managers, investment funds, private credit vehicles, insurers and pension funds all suffered correlated valuation losses after the outbreak of the war, the review said, and those losses were initially more pronounced than after Russia’s 2022 invasion of Ukraine.

The ECB said several vulnerabilities could amplify stress in that part of the financial system: asset prices that remain high by historical standards, concentrated holdings and thin liquidity buffers. Equity valuations, it said, are still “stretched by historical standards” despite recent market adjustments.

It also highlighted an additional external risk from stress in U.S. private credit markets, which could spill into euro-area non-banks through cross-border exposures and shifts in investor sentiment. One specific fragility flagged by the ECB was short-term funding concentration: more than 80% of non-bank repurchase agreement, or repo, funding is provided by about 10% of non-bank lenders, a dependence the ECB said could prove difficult to replace in stressed conditions.

On banks, the ECB said stronger capital and liquidity buffers and improved profitability should help limit immediate systemic risk. But it warned that if the shock endures, second-round effects could still feed back into the banking system through weaker borrowers and rising strain on sovereign finances.

That fiscal channel is another focus of the review. The ECB said fiscal expansion in an already challenging geoeconomic environment could put pressure on highly indebted euro-area countries and lead investors to reprice sovereign risk, effectively demanding higher compensation to hold their debt.

The policy message was twofold. Macroprudential authorities — regulators that use systemwide safeguards to limit financial risk — should maintain existing bank capital-buffer requirements and borrower-based measures, the ECB said. At the same time, it called for a “comprehensive policy response” to address liquidity and leverage vulnerabilities in non-bank finance.

The review also said advancing the European Union’s savings and investments union will be essential to support growth and protect financial stability. The Financial Stability Review is the ECB’s twice-yearly assessment of systemic risks; the previous edition was published in November 2025.