Geopolitical risk and its implications for macroprudential policy
Macroprudential Bulletin 28, April 2025.
This article explores the link between geopolitical risk and bank solvency and discusses the potential implications for macroprudential policy. Drawing on 120 years of data, analysis reveals that heightened geopolitical risk has been associated with lower bank capitalisation over the past century. This effect can arise through multiple economic and financial channels, including reduced economic activity, surging inflation, increased sovereign risk, and shifts in capital flows and asset prices. However, the analysis also finds that the impact of geopolitical risk on bank solvency has been non-linear, with major geopolitical risk events having a much stronger effect than less major or more localised geopolitical shocks, with the effect being heterogenous across countries. Macroprudential policy and microprudential supervision play important and complementary roles in ensuring that banks are sufficiently prepared to absorb potential geopolitical shocks. While microprudential supervision ensures that geopolitical risk is factored into capital and liquidity planning, macroprudential capital buffer requirements can be released when shocks materialise, thereby supporting banks in absorbing losses while maintaining the provision of key financial services to the real economy.
1 Introduction
Geopolitical risk has attracted renewed attention in recent years. Geopolitical risk can be defined as “the threat, realization, and escalation of adverse events associated with wars, terrorism, and any tensions among states and political actors that affect the peaceful course of international relations”.[1] Well-known geopolitical risk events of the last 40 years include the First Gulf War in the early 1990s and the 9/11 terrorist attacks in 2001. While geopolitical risk was rather low by historical standards between 2018 and 2021, the Russian invasion of Ukraine and the conflict in Gaza have led to renewed spikes (