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The European Supervisory Authorities (ESAs) identify ongoing geopolitical tensions—particularly conflicts affecting energy markets—as key risks, potentially driving inflation, weaker growth, and financial market volatility. It states that high valuations and rising interest rates may increase liquidity and asset-quality risks. The update also highlights vulnerabilities in private finance due to limited transparency, complex interconnections, and shifting investor sentiment. Despite these concerns, it describes the EU financial sector as broadly resilient, with strong capital and liquidity positions. Authorities are said to urge continued vigilance, risk monitoring, and prudent management of exposures, especially regarding geopolitical developments and private markets.

The report underscores the robustness of Europe’s insurance, reinsurance, and pension sectors despite a volatile macroeconomic environment. Strong capital positions persist, with median Solvency II ratios slightly down but stable. Premium growth surged, with non-life up 8.2% and life at 13.8%. Profitability improved, with median return on assets at 0.7%. However, it points out that risks from exchange rate volatility, elevated interest rates, geopolitical tensions, and cyber threats require vigilant monitoring. It also notes significant US equity exposure, urging caution amid potential market corrections.

The paper examines non-linearities in how geopolitical risk (GPR) shocks affect the economy. Using a VARX model, it finds that large GPR shocks (above 4 standard deviations) significantly increase uncertainty, leading to precautionary saving and reduced consumption, with a more moderate impact on inflation due to conflicting demand and uncertainty effects.