Amid ongoing geopolitical conflict and shifting global alliances, European financial regulators are warning the financial industry about the risk of relying on foreign tech companies, market infrastructure providers and their exposure to U.S. markets.
In a new report, the European regulators — the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority — identified the financial industry’s external dependencies, along with emerging technologies and private credit, as key vulnerabilities for the financial system.
The regulators warn that the financial sector’s reliance on non-EU providers and infrastructures, “could amplify the impact of geopolitical shocks and operational disruptions.”
A growing dependence on foreign tech companies was flagged as a particular concern, the regulators said — alongside cyber risks linked to increasingly powerful AI models and a reliance on foreign financial infrastructures, given that Europe’s clearing, repo and credit ratings markets are largely intermediated by foreign entities (primarily U.K.-based firms).
“This reliance on non-EU counterparties increases dependencies on other regulatory regimes and can increase vulnerabilities to geopolitical events outside the EU,” it warned.
Along with the reliance on foreign tech and infrastructure providers, the report also flagged investment funds’ exposures to U.S. markets, particularly equity funds and alternative investment funds, as a key risk.
For the banking sector, elevated geopolitical tensions are intensifying uncertainty, it also said.
“Although direct exposures to the regions affected by geopolitical tensions remain limited, indirect exposure and second-round effects could have wider implications for borrowers and funding conditions,” it said. “Adverse developments from geopolitical tensions could lead to deteriorating asset quality and subdued credit demand, which are not least reflected in banks’ impairment overlays.”
The regulators also highlighted the risks posed by private credit.
“Although the sector remains relatively small in the EU, its rapid growth, limited transparency and increasing links with the wider financial system could create risks during periods of stress,” they said.
“Liquidity mismatches in private credit funds could amplify redemption pressures and generate spillovers to banks through funding and common exposures. Banks could also face credit risks through shared borrowers and financing commitments to private credit vehicles,” they noted.
The regulators called on both industry firms and national supervisors to closely monitor these emerging risks, and to strengthen their readiness to deal with the realization of these vulnerabilities, “through crisis preparedness, resolution coordination and more effective and adaptable regulation.”