Intertwined Triple Risks: Euro Area Financial Stability Under Pressure - Analysis of the ECB's November Assessment Report​

On November 26, 2025, the European Central Bank (ECB) released its latest Financial Stability Review, clearly stating that the vulnerability of the euro area's financial stability remains elevated. The report identifies U.S. tariff and trade uncertainties, as well as spillover risks from U.S. fiscal and debt issues, as core external threats, while warning of potential hidden dangers in the banking sector's credit and financing risks—sounding the alarm for the seemingly stable regional financial market. Against the backdrop of global policy divergence and the reshaping of geo-economic patterns, the interweaving and superposition of these risks are testing the resilience of the euro area's financial system.​

External risk spillover has become a focal topic of this report. The report emphasizes that although the immediate impact of geopolitical tensions has eased, market attention has shifted to the long-term effects of tariff and trade frictions. Luis de Guindos, Vice President of the ECB, openly stated that while the trade policy uncertainty index has declined from its April peak, it remains at a historically high level, and a further surge cannot be ruled out. More notably, U.S. tariff policies and the depreciation of the U.S. dollar have formed a "dual impact"—the weaker dollar has further amplified the cost pressure of tariffs on euro area exporters. As an export-oriented economy, the declining profitability of the euro area's manufacturing and foreign trade enterprises is gradually transmitting to the financial system.​

The spillover effects of U.S. fiscal and debt risks are equally noteworthy. The report points out that the United States' persistent large fiscal deficits, rising debt-servicing costs, and high financing needs have raised market concerns about its fiscal credibility, thereby undermining the "safe asset" attribute of U.S. Treasury bonds. As a core asset of the global financial system, fluctuations in the U.S. Treasury bond market spread to the euro area through cross-border investment, exchange rate transmission, and other channels, potentially triggering a repricing of the euro area bond market—particularly exerting pressure on member states with weaker fiscal fundamentals. The ECB specifically warns that such risks may trigger a broad reassessment of euro area sovereign risks and exacerbate regional financial fragmentation.​

Internally, credit and financing risks in the banking system have become key hidden dangers to stable operations. The report shows that although the euro area banking sector as a whole maintains strong profitability and stable asset quality, potential risks are accumulating. On one hand, banks have significant credit exposure to industries vulnerable to tariffs; if these enterprises experience operational deterioration or even large-scale layoffs due to trade shocks, it will directly lead to an increase in non-performing loan ratios and erode banks' asset quality. On the other hand, household sector debt-servicing capacity is highly tied to the labor market, and marginal loosening in the labor market may trigger a rise in household debt default risks. The ECB also warns that high valuation and concentration issues in financial markets are prominent—market volatility caused by the overvaluation of U.S. tech giants may impact euro area non-bank financial institutions through cross-border capital flows, which in turn will transmit to the financing environment of the banking system.​

Faced with the complex situation of intertwined multiple risks, the ECB has clarified the core direction of risk response in the report. At the regulatory level, it will introduce innovative tools such as "reverse stress testing," requiring banks to set capital consumption thresholds and derive risk scenarios to enhance the effectiveness of capital buffers; at the same time, banks are required to closely monitor overseas risk exposure and strengthen risk management and control of international business, export credit, and foreign exchange activities. At the policy level, although the report does not signal further interest rate cuts, it emphasizes the need to maintain the prudence of monetary policy and strike a balance between supporting economic growth and preventing financial risks. In addition, strengthening the macroprudential regulatory framework for non-bank financial institutions has become an important measure to address regulatory gaps.​

In terms of market reaction, following the release of the report, the euro area financial market showed a "cautiously optimistic" trend. On November 26, the STOXX 600 Index rose by 1.1%, with bank stocks leading the gains—reflecting market recognition of the ECB's risk warnings and response measures. However, in the long run, resolving risks still faces multiple challenges: uncertainties in U.S. trade policies, capital flow volatility caused by global monetary policy divergence, and inconsistent implementation of fiscal discipline within the euro area may all exacerbate the vulnerability of financial stability.​

The ECB's assessment report is essentially a profound warning about the interconnected risks of the global financial system. In today's era of deep economic globalization, policy adjustments and risk accumulation in a single economy may trigger cross-border spillover effects. For the euro area, only by strengthening the resilience of the financial system, improving cross-border risk prevention and control mechanisms, and advancing regional economic integration can it safeguard the bottom line of financial stability amid the dual tests of external shocks and internal pressures. In the future, the market needs to focus on the implementation effect of the ECB's regulatory policies, as well as the dynamic changes of external variables such as U.S. trade negotiations and fiscal policy adjustments.