The current economic, political and military tensions are giving rise to significant economic costs, such as higher energy prices and supply chain problems due, for example, to sanctions. Geopolitical risks have again increased in recent years, as shown in the corresponding index (see Figure 18).

Figure 18: Index for geopolitical risks

100=Average from 1985 to 2019; 30-day moving average

Geopolitical developments: drivers of known risks

Geopolitical upheavals can have far-reaching effects on the entire financial system. Although they are not an independent type of risk, they can influence and even exacerbate the risks relevant to supervision. For example, geopolitical upheavals are key risk drivers for the credit and liquidity risk of supervised entities.

The German financial system is highly vulnerable to geopolitical shocks. One reason for this is Germany’s strong international trade links – the export ratio was 43.4% in 2023. Another reason is that the financial sector itself is highly interconnected internationally.

In 2024, protectionist and isolationist tendencies could be observed worldwide. This trend may continue. An aggravation of the geopolitical situation could have a noticeably negative impact on the German economy and therefore also on the financial sector entities under BaFin’s supervision. This could happen, for example, in the event of a major trade dispute between leading economic powers or military conflict between countries that are important for global supply chains.

Growing geopolitical conflicts have also led to a further increase in the risk of terrorist financing .

Conflicts also shifting to the digital world

For some years now, geopolitical conflicts have been increasingly shifting to cyberspace, with a growing number of state-initiated attacks. The financial sector, other companies and critical infrastructure such as energy utilities were repeatedly targeted by cyberattacks worldwide in 2024. Other measures have also been aiming at unsettling and misinforming the population – by spreading false reports on social media, for example.

Another means of exerting pressure geopolitically would be for state players to increasingly assert influence over cloud infrastructure providers and payment service providers. There is a risk that these services would no longer be available if a conflict were to escalate. This would have a significant negative impact on the international transfer of data and funds.

Direct effects on the financial sector

Geopolitical upheavals can have a direct operational impact on companies in the financial sector – for example, if they become the target of state-initiated cyberattacks. This could involve the leaking of business secrets and customer data. Attacks on internet hubs or the power grid can also inflict damage on companies.

If sanctions are imposed on a particular country, companies are obliged to comply with them. This may also directly affect the activities and processes that supervised entities have outsourced to the respective countries. Geopolitical conflicts could also impact the liquidity situation of companies in the financial sector, for example if access to international financial markets were to be restricted by (de facto) capital controls.

In 2024, the risks for German banks due to the granting of loans to countries such as China, Taiwan and Russia were, in the aggregate, relatively low.

Indirect effects on the financial sector

Geopolitical turmoil can also have indirect effects on companies in the financial sector by causing the economic environment to deteriorate and volatility on the financial markets to increase.

There is also a risk that assets held by supervised entities could lose value as a result of geopolitical conflicts. This could be the case, for example, where loans and bonds are issued to companies that are encumbered by protective tariffs or import restrictions.
These indirect effects are more difficult to quantify and predict, but can have more dire consequences than the direct effects. It is therefore important that supervised entities have good risk management in place and conduct scenario analyses.

New risks due to structural adjustments

Geopolitical tensions often lead to structural adjustments in the economy, the financial system and political structures, resulting in de-risking and even decoupling. In economic terms, these measures are aimed at reducing dependencies and reorganising supply chains. Political measures include increasing defence spending, forming security alliances and stepping up the expansion of cybersecurity. In the medium term, this can reduce vulnerability to geopolitical shocks.

However, such adjustments will also give rise to new dependencies. If entire regions or business sectors become less attractive in terms of risk, trade and investment flows will shift – and concentrate on fewer countries. This may result in reduced risk diversification and elevate the risks to financial stability in the long term.

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Risks in BaFin's Focus 2025
Foreword by the President

Main Risks in BaFin’s Focus

1. Risks arising from corrections on the real estate markets
2. Risks arising from significant corrections on the international financial markets
3. Risks arising from corporate loan defaults
4. Risks arising from cyber incidents with serious consequences
5. Risks arising from inadequate money laundering prevention
6. Risks arising from market concentration due to the outsourcing of IT services

Trends

1. Digitalisation
2. Sustainability