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Growing geopolitical tensions and rising cyber risks are a threat to financial stability, European regulators are warning.

In a joint report, the trio of major financial regulators — the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) — highlighted an array of geopolitical concerns, including U.S.-driven trade disruptions, extreme policy uncertainty and ongoing conflicts, which have unsettled the macroeconomic outlook.

Against this backdrop, the report pointed to growing risk of fragmentation in global financial markets, the prospect of rapid shifts in capital allocation and intensified current volatility amid sharp changes in trade patterns. It also pointed to the potential for the rise in uncertainty to “amplify market volatility, liquidity risk, and increased credit spreads in debt markets.”

In particular, securities firms, markets and asset managers are exposed to rapid market reactions “given recent record high U.S. stock valuations and historically low EU corporate bond spreads,” it said.

The report also highlighted the risk posed by rising leverage in alternative investment funds, increased exposure to U.S. equities in the European fund sector and the risk of shocks to funds that face liquidity mismatches. 

Additionally, the rebound in cryptoasset valuations and volatility, along with the sector’s increased connections to traditional financial markets, also pose a growing risk, it said. 

“Financial institutions must navigate growing uncertainties, including exposure to international markets, liquidity risks and the evolving role of artificial intelligence,” it said. “Ensuring resilience in the face of these developments is crucial.”

To that end, the report called for heightened vigilance from both financial industry firms and regulators, along with proactive risk management to “prepare for continued market volatility, consider the potential materialization of liquidity risks and stand ready to adapt to adverse developments, including by provisioning adequately.”

“As financial markets continue to evolve, international cooperation and regulatory preparedness will be key to maintaining stability,” it said. 

At the same time, it also stressed the need for stronger cyber resilience.

“To better manage cyber and digitalization risks, supervisors and financial institutions should continue to strive for robust data governance, critically assess AI solutions and their compliance with the AI Act,” it said.