Indirect risks from regional conflict pose threat to EU banks, agency warns

European Union banks’ direct exposure to the Middle East remains limited, with risks from the conflict more likely to emerge through indirect channels such as inflation, tighter financial conditions and weaker growth, according to the rating agency DBRS.

The agency said that, although exposures to the region are small relative to total assets, the conflict could still affect European lenders by putting pressure on domestic corporate borrowers with links to the Middle East and, more broadly, by weighing on asset quality.

“European banks’ direct exposure to Middle Eastern counterparties remains negligible, representing around 0.5 per cent of total banking sector assets,” said Borja Barragan, assistant vice president, European Financial Institutions Ratings.

At the same time, he warned that the conflict raises the possibility of indirect pressures through higher inflation, tighter financial conditions and slower growth, even if those pressures could be partly offset by the earnings support banks typically receive from higher interest rates.