By Monica Johnson, International Banker
“I think the geopolitical situation is the thing that most concerns me, and we don’t know the effect of that in the economy,” Jamie Dimon, JPMorgan Chase’s chief executive, acknowledged in September 2023 when speaking to CNBC TV18 in India, confirming that the outbreak of the Russo-Ukrainian War in February 2022 was the biggest risk faced by his bank. “We have dealt with inflation before, we dealt with deficits before, we have dealt with recessions before, and we haven’t really seen something like this pretty much since World War II.” With additional global conflicts having erupted since then, moreover, geopolitics has moved further towards the top of banks’ risk-management agendas.
“Measuring Geopolitical Risk”, a research paper by Dario Caldara and Matteo Iacoviello published in the American Economic Review (AER) in April 2022, defined geopolitical risk as “the threat, realisation, 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”. It can thus severely impact economic growth and development across one or many regions of the world, such that banks’ health could be distinctly vulnerable to profound changes in the global geopolitical landscape.
Rarely have those changes been more profound in recent decades than in 2025. Indeed, no matter where one looks on the map these days, brutal hostilities are unlikely to be located too far away. Whether it’s Eastern Ukraine, Western Asia, the Indian subcontinent, West Africa, Sudan or the Democratic Republic of the Congo (DRC), it is fair to say that we are living in a time of heightened aggression between countries and/or militant organisations. And with many of those wars proving hugely devastating for local populations and economies, the palpable threat that they pose to the global financial system has become undeniable.
Indeed, the implications that these conflicts have for financial services, financial markets, the global economy and much more mean that financial institutions are simply unable to ignore the spectre of geopolitical risk any longer. This can be clearly observed in the reported views of banking leaders, such as those captured in the Bank of England’s (BoE’s) biannual Systemic Risk Survey, which polls 55 financial firms to assess their views of the most impactful risks to the stability of the United Kingdom’s financial system, should those risks materialise.
Published on April 9, the latest survey for the first half of the year 2025 was conducted between January 27 and February 24 and revealed that geopolitical risk remained the most frequently cited type of risk (named by 87 percent of participants), followed by cyberattack threats (73 percent of respondents). Geopolitical risk was also cited as the “number one” source of risk to the UK financial system by 42 percent of respondents, the most challenging to manage as a financial firm (67 percent) and the most likely risk to materialise (80 percent), the BoE also found.
But how exactly does geopolitical risk impact the banking sector, and through which specific transmission mechanisms? According to Dow Jones, geopolitics plays a pivotal role in shaping market risk, trade relations, capital flows and regulatory frameworks. “The interplay between geopolitical developments and the global economy creates both direct and indirect effects on the banking sector. Geopolitical events influence market sentiment, macroeconomic stability, counterparty risk and market volatility,” a report by the US financial media outlet published on January 10 stated. “They also shape policies such as sanctions, trade controls and investment restrictions. These factors require banks to adapt their processes and procedures in response to evolving geopolitical conditions.”
A major study published on February 4 analysed a dataset of 11,168 observations on 688 listed banks across 33 countries to examine the impact of geopolitical risk on banks’ systemic risk—that is, the shock that not only disrupts financial services but also has potentially detrimental effects on the real economy. The paper’s authors, from China’s Yanshan University, Wuyi University and Northeastern University at Qinhuangdao, found that geopolitical risk significantly increased banks’ systemic risk by increasing individual bank risk and bank-asset risk, as well as triggering asset price-bubble bursts.
The research study identified key transmission mechanisms through which elevated geopolitical risk unleashes “strong contagion and destructive power” on the global economy and financial system via the channel of banks’ systemic risk. “Firstly, it reflects the likelihood of events such as war, terrorism, and heightened tensions between nations. When geopolitical risk increases, the countries involved face greater macroeconomic uncertainty,” the report stated, citing previous studies by Caldara and Iacoviello (2022) and Phan et al. (2022). “Research shows that this uncertainty exacerbates information asymmetry between banks and borrowers, reducing banks’ willingness to lend and leading to inefficient loan allocation. This directly harms bank revenues and increases non-performing loans.”
The paper also highlighted the indirect impact that geopolitical risk may have on banks through the corporate and household sectors. “Elevated geopolitical risk creates uncertainty about government policies, negatively affecting corporate investment, output, and labour demand (Caldara and Iacoviello, 2022). Declines in investment and output significantly reduce corporate revenues, while reductions in employment directly affect household incomes,” the authors added. “As a result, corporations and households may default on their debts, sharply increasing the likelihood of loan defaults and raising banks’ asset risk (Beck and Keil, 2022). These adverse effects on bank assets and income ultimately harm bank profitability, solvency, and capital, thereby increasing the fragility of the banking system (Duan et al., 2022).”
The impact of rising geopolitical risk on bank capitalisation has also proven to be significant when examining the major geopolitical events of previous years. On April 17, the European Central Bank (ECB) published its “Macroprudential Bulletin”, focusing on the link between geopolitical risk and bank solvency and also the potential implications such risk has for macroprudential policy. Armed with data from 17 countries worldwide over the 1900-2020 period, the study found that bank capitalisation tended to decrease following major geopolitical-risk events, with the banking sector’s capitalisation having declined sharply during the two world wars, with an average drop of five percentage points.
Additionally, the ECB disclosed that the impact of geopolitical risk on bank solvency has been non-linear, with more significant geopolitical-risk events having more than proportional effects on solvency. “All else being equal, major geopolitical events like the two world wars led to a statistically significant decline in bank capitalisation of 0.53 percentage points, whereas less major events, despite also having a negative and significant effect, resulted in a much smaller 0.07 percentage point contraction,” the bulletin stated.
The impacts of major geopolitical-risk events can also vary significantly across countries, the ECB added, with econometric estimates finding that major geopolitical-risk events triggered stronger contractions in bank capitalisation in some countries, while other countries experienced negligible or statistically insignificant capital impacts. “During major geopolitical shocks, countries like France, Germany, Italy and Belgium that were at the epicentre of the most extreme events in the 20th century—i.e., the two world wars—faced an average capital contraction of about 1 percentage point, while in countries like Australia, Canada, Finland, Norway, Spain and Switzerland the contraction was smaller or not statistically significant.”
It must also be highlighted that geopolitical risk has profound implications for banking regulation. Indeed, the study by the three Chinese universities also examined whether banking regulatory policies can mitigate the impact of geopolitical risk on financial stability. “The results indicate that stricter restrictions on banking activities, more robust deposit insurance systems, and regulatory agencies with stronger enforcement capabilities help counteract the rise in systemic risk induced by geopolitical risk, thereby supporting financial stability.”
As the challenges of an increasingly complex geopolitical-risk landscape evolve, therefore, banks must adapt their approaches to risk management. This means not only gaining a consistent, deep understanding of all the ways in which specific geopolitical events can impact banks’ lending capacities, but also how geopolitical risk may intertwine with related areas of the bank, such as compliance, fraud, money laundering and other financial crimes.
For example, cybersecurity risks are increasingly tied to geopolitical factors, with Dow Jones also noting that financial institutions have become prime targets for cyberattacks due to their central roles in the global economy. “These attacks are particularly harmful, as they disrupt vital economic functions. In Europe, the frequency of attacks on banks has doubled since the pandemic,” the firm’s January 10 report also observed. “Misinformation, sabotage, and cyber warfare are rising threats, especially for global banks. Given the geopolitical implications, financial institutions must invest in robust cybersecurity measures to protect against these growing risks.”