The European Supervisory Authorities (ESAs) have warned that the war in the Middle East poses “significant risks” to the global financial landscape, but highlighted that IORPs continue to “demonstrate resilience”.

The ESAs include the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA).

Their Spring 2026 Joint Committee update on risks and vulnerabilities in the EU financial system focused on the challenges arising from ongoing geopolitical tensions and developments in private finance.

For example, the risks arising from the current war in the Middle East include higher energy prices, potential inflationary pressures and weaker economic growth.

Against this backdrop, the ESAs have warned that elevated equity valuations and compressed bond spreads could increase the likelihood of sudden repricing events and reduced market liquidity, amplifying volatility and existing market vulnerabilities.

At the same time, they warned that higher interest rates may tighten funding conditions and pressure asset quality.

The ESAs highlighted tensions around the Strait of Hormuz and airspace closures as multi-line risks, although war exclusions are expected to limit insurers’ net losses.

More broadly, geopolitical events and cyber-attacks could generate shocks and disrupt critical infrastructure, they said.

Given the ongoing geopolitical tensions, the Joint Committee of the ESAs called on supervisors and market participants to maintain a high level of readiness.

This includes proactive risk assessments with appropriate tools, the prudent management of sovereign exposures and the inclusion of geopolitical context in risk management.

Despite the challenging geopolitical environment, European financial markets have continued to demonstrate resilience, their report said. For example, the insurance and IORP sectors maintain robust capital and funding positions.

The ESAs said IORPs’ improvement reflects the combined effect of strong investment returns, driven by higher equity prices, and the impact of rising long-term interest rates, which lowered the value of pension liabilities.

Looking ahead, however, the ESAs flagged that related adjustments introduced by the 2027 Solvency II Review and the current IORP II proposal could trigger reallocation of investments, which may influence insurers’ and IORPs risk profiles.

The Spring 2026 report also focused on emerging risks in private finance driven by limited data, low transparency, prolonged growth and complex, opaque interconnections with the broader financial system.

These factors, they said, increase the potential for sudden market shifts in investor liquidity and spillovers to other parts of the financial system.

The ESAs noted that recent developments in certain US private credit funds, linked to artificial intelligence (AI) replacing more traditional software businesses, illustrate potential vulnerabilities related to changes in investor sentiment.

Despite an “increasing trend” towards the asset class, IORPs’ exposure to private finance currently remains low, at just 4.4 per cent at the end of 2024.

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