How much risk are banks in the Eurozone from the conflict? - The rise in energy prices will increase inflation, affecting economic activity
Eurozone banks face only a limited direct impact from the war in Iran, but the bigger risk lies in how a weakened economy could affect lenders' balance sheets, a senior European Central Bank supervisor said.
The threat of wider conflict in the Middle East has raised fears of another inflationary explosion and added pressure on growth in the eurozone, which depends on Gulf suppliers for some of its gas and on Suez Canal routes for Asian goods.
Pedro Machado, one of the ECB's top supervisors of member banks, said direct exposure to Iran and Israel was small compared to their ability to absorb losses at 0.7% of core capital for assets, such as loans, and 0.6% for liabilities such as bank bonds.
"Even if neighboring countries are included, the exposures are quite limited, representing slightly less than 1% of the total assets of supervised entities," he said.
The most significant risk, he added, lies in any renewed rise in energy prices affecting inflation and, ultimately, a slowdown that would put borrowers in difficulty.
"In the long term, if energy prices increase, we could have an increase in inflation with possible recessionary impacts in terms of economic activity. And this translates into a possible impact on unemployment, which is a very important variable for banks," Machado said.
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