The US and Israeli campaign against Iran that began on 28 February and Iran’s retaliatory strikes against Gulf neighbours have sent shockwaves around the world. The full human cost of the conflict — still ongoing at the time of writing — is not yet fully known, but is certain to be very severe. Meanwhile the consequences for the global economy from rapid swings in energy prices and accompanying financial market volatility have also been very significant. These in turn will have a substantial impact on banks in Europe and around the world.

The Iran conflict has thus made the issue of geopolitical risk for European banks — much discussed in the abstract — very real. It is also another illustration of how the rules and norms that previously governed international relations are coming under increasing strain. In this context of heightened global turbulence financial institutions will need to plan for a much wider range of possible scenarios — including some that they may previously have considered unthinkable.

The current situation in the Middle East is fluid and rapidly evolving. This means that banks need to consider and prepare for a wide range of possible scenarios. These could impact banks via different transmission channels, including energy prices, financial market volatility and physical harm to bank staff and facilities in the region. The European Central Bank (ECB) has summarized the main ways in which geopolitical shocks could feed through into the financial and non-financial risks banks must manage in a geopolitical risk framework published in 2024.

So far, the Iran conflict has impacted European banks mainly via oil and gas prices. Economists have offered a range of predictions for how these might evolve, depending on how long exports through the Straight of Hormuz are disrupted and production facilities in the Gulf are shut down. A prolonged rise in the oil price would likely result in increased credit defaults as both businesses and households are squeezed by higher energy costs. It could also push up inflation and expectations for interest rates. In parallel, oil price volatility could feed through into financial markets, potentially exposing banks’ securities portfolios to rapid price movements that could generate losses where portfolios are not fully hedged.

Meanwhile, European banks have so far seen little impact via the ‘safety and security’ channel. As ECB Supervisory Board member Pedro Machado alluded to in a recent interview, European banks have only limited operations in the Gulf region, and do not depend greatly on critical staff or facilities that could be at risk of attack. There have also been no reports of an increase in cyber attacks against European financial institutions so far in the current conflict. That could, however, change, for example if the conflict escalated or spread geographically.

Future geopolitical shocks could also affect banks mainly through the operational risk channel: for example hybrid conflict scenarios in which belligerents employ (physical or cyber) sabotage or incite domestic civil disorder to put pressure on European governments or hinder their ability to act in the international arena. ECB Supervisory Board Vice-Chair Frank Elderson highlighted how a sudden operational outage can severely damage to even a financially sound bank’s business: in a 2025 speech Elderson cited the example of a Dutch bank that, although solvent and liquid, collapsed in 2022 after losing access to its IT systems when its Russian parent company was hit by international sanctions. In a similar vein, Supervisory Board Chair Claudia Buch warned last November that “exposure to external providers can become a vulnerability in an adverse geopolitical risk scenario.”

Heightened geopolitical tensions look set to persist. So will need to manage the additional risks — both financial and non-financial — that geopolitical shocks could bring. Analysing potential scenarios and identifying points of vulnerability is an essential first step. But to be resilient against future shocks, banks will also have to invest in greater resilience. That could include recalibrating business models to reduce exposure to high-risk sectors or geographies, as well as reviewing their operational dependencies, including on third-party providers. Beyond that, breaking down internal silos and developing proactive, cross-divisional emerging risk capabilities (including rapid response plans for different types of scenario) would also enable banks to respond more agilely in a future crisis.

No-one can be sure when or where the next economic or military conflict will occur. But building resilience now could make all the difference when the next crisis erupts.