The main indicators of financial stress today offer a relatively tranquil picture of Europe. We are not facing a banking crisis and markets are functioning normally. Although this does not mean that there have not been, nor will there be, episodes of volatility. In April 2025, the uncertainty sparked by the announcement of new American tariffs generated a sharp international correction. Not even a year had passed when, at the end of February 2026, the outbreak of war in the Middle East sent energy prices surging, triggered stock market sell-offs, raised inflation and interest-rate expectations, and widened European high-yield bond spreads by around thirty basis points. Yet none of these episodes triggered a generalized destabilization.
The ECB’s CISS indicator measures to what extent tensions spread simultaneously across five segments of the financial system: the money market, debt, equities, currencies, and financial intermediaries. Its value rises not only when stress grows in each market, but when shocks appear at the same time and begin to reinforce each other.
A disruption concentrated in a single market may initially have a limited systemic reach, but it must not be ignored. The dot-com and housing bubbles began in specific domains before spilling over into credit, balance sheets, and the real economy.
“A disruption concentrated in a single market may initially have a limited systemic reach, but it must not be ignored”
Regarding artificial intelligence, it cannot yet be stated that there is an equivalent bubble, but two signals do warrant vigilance: historically high valuations and the growing concentration in a few large tech companies. The ECB also warns that euro-area investors have quadrupled their positions in U.S. equities over the past decade, increasing their exposure to a potential correction in those segments.
The latest reading of the CISS confirms that Europe is not experiencing a financial-stress situation. The new daily index reached 0.211 on 11 April 2025, during the tariff shock, but its 2026 peak was much lower: 0.069 on 3 March, after the Middle East escalation. Since May it has generally remained at very low levels and the most recent figure, as of 4 September, is 0.026. The signal is not that risk has disappeared, but that tensions are not currently spreading through the financial system with intensity and simultaneity.
Daily evolution of the new euro-area CISS between January 2025 and September 2026. Notable is a maximum of 0.211 in April 2025, another of 0.069 in March 2026, and a final value of 0.0165 in August.
As the chart shows, the March 2026 uptick was visible but well below the tariff episode of April 2025. The index then returned to a region of reduced tension. The CISS does not have a mechanical threshold that separates safety from crisis.
“The signal is not that risk has disappeared, but that tensions are not currently spreading through the financial system with intensity and simultaneity”
This is a very useful indicator for gauging whether strain is spreading, but it does not by itself aim to anticipate all fragilities capable of amplifying the next shock. In this sense, an economy can exhibit a normal financial temperature while simultaneously accumulating debt, leveraged positions, or assets that are difficult to sell. That is where the European Systemic Risk Board (JERS in Spanish), the EU’s independent body responsible since 2010 for macroprudential oversight of the financial system as a whole, begins its work.
In June 2026 it acknowledged that some macrofinancial risks had moderated: the prospect of a memorandum of understanding to end the war in the Middle East and the possibility of a sustained reopening of the Strait of Hormuz could reduce the extreme risk to energy supply; markets absorbed the initial shock and the financial system showed resilience. But the JERS considers that the medium-term risk to stability remains elevated. Among persistent vulnerabilities it lists weak growth, high public debt in some countries, elevated prices of several risk assets, and liquidity and leverage mismatches in certain investment funds. It also adds a cyber risk that it already deems severe.
Valuations affect especially technology equities linked to AI, some highly concentrated U.S. markets, and, with less transparency, private credit, leveraged loans, and high-yield bonds. If the earnings or productivity expectations tied to AI were to be revised abruptly, the losses would spill beyond tech firms to European funds holding those assets and to the entities financing them.
In short, the difference between the two diagnoses can be summed up as follows: the CISS tries to determine whether the fire has started to spread, while the JERS also watches the amount of flammable material accumulated and the available capacity to contain it.
A stronger banking system
European banks find themselves in a position considerably stronger than before the 2008 financial crisis. The large entities directly supervised by the ECB closed the first quarter of 2026 with a CET1 capital ratio of 15.99%, a return on equity of 10.02%, and a nonperforming loan rate of 2.18%. The liquidity coverage ratio stood at 153.93%, well above the regulatory minimum of 100%.
These indicators are vital. A bank with adequate capital, ample liquidity, and few impaired loans can absorb losses without immediately restricting credit to households and businesses. Profitability also provides the capacity to generate capital if the economy worsens.
“A bank with adequate capital, ample liquidity and few impaired loans can absorb losses without immediately restricting credit to households and businesses”
Nevertheless, both the liquidity-coverage ratio and the stable funding ratio declined compared with the previous quarter. The latter fell to 125.63%, its lowest level since the start of the series in 2021, though it remains well above the regulatory requirement. The European Banking Authority also notes that the aggregate asset quality masks significant country-to-country differences and a greater concentration of risk in consumer credit, small and medium-sized enterprises, and the commercial real estate sector. The banking system is strong but operating in a somewhat less predictable environment than a few months ago.
The risk may lie outside banks
The second caution concerns the transformation of the financial system. After 2008, the regulation understandably focused on strengthening banks. Meanwhile, an increasing portion of funding and risk-taking has shifted toward nonbank financial intermediaries. Nonbank financial institutions (NBFIs) — such as investment funds, money-market funds, hedge funds, insurers, pension funds, and private-credit vehicles — play an expanding role in financing the economy, accumulating risks less visible than those of banks. Some offer investors the possibility of quick redemptions while holding illiquid assets, and others finance highly leveraged transactions through debt.
“A growing share of financing and risk-taking has shifted toward nonbank intermediaries”
These entities are not completely outside the reach of authorities. They are subject to different regulations and supervisors, but the framework is less uniform than the banking one and information gaps persist, especially about activities outside the European Union and about complex chains of counterparties.
The mechanisms can take highly concrete forms. An open-end fund can offer daily redemptions while investing in corporate bonds or real estate that take much longer to sell. A hedge fund can finance via repos a highly leveraged arbitrage strategy: a relatively small price change triggers margin calls and forces positions to be unwound. A semi-liquid private credit vehicle may lend directly to software firms or highly indebted companies and, at the same time, promise periodic redemption windows for retail investors. And money-market funds can provide short-term funding to banks and firms, withdrawing it quickly when risk appetite falls.
The ECB-JERS joint report on the links between banks and nonbank intermediaries identifies two delicate channels precisely. Short-term funding that these entities provide to banks and the loans, including repos, with which banks finance hedge funds and highly leveraged broker-dealers. If these positions must be unwound in a disorderly fashion, forced selling can push prices down, trigger additional losses, and spread the adjustment to other entities.
“If these positions must be unwound in a disorderly fashion, forced selling can push prices down, trigger additional losses and spread the adjustment to other entities”
Finally, private credit deserves an additional clarification. The ECB considers that euro-area direct exposure remains limited and that it would, on its own, be unlikely to trigger a systemic crisis today. However, it warns of possible indirect losses for insurers and pension funds if the correction spreads to leveraged loans, high-yield bonds, and equities, as well as the market opacity and redemption pressures observed in some semi-liquid U.S. vehicles.
Public debt matters again
The last vulnerability centers on the combination of high public debt, new spending needs such as defense, and interest rates that are no longer exceptionally low. In the first quarter of 2026, debt stood at 88.9% of GDP in the euro area. The highest levels were Greece (143.5%), Italy (138.9%), France (117.6%), and Belgium (109.1%). Not all follow the same path: Greece reduced its ratio over the past year, while the largest year-on-year increases were in Finland (+5.5 percentage points of GDP), Bulgaria (+4.8), Poland (+4.5), Romania (+4.3), France (+4.0), and Belgium (+3.1).
The difficulty is not only the volume accumulated. Some governments must finance simultaneously aging populations, the energy transition, technological investment, defense, and climate adaptation. And in this context, if they start from high deficits and rising debt, they have less room to cushion a recession or rescue parts of the financial system without raising questions about their own sustainability.
A rise in the yields on public debt not only makes government financing more expensive. It also reduces the market value of the bonds held by banks and funds, raises the cost of corporate credit, and limits the budgetary capacity to respond to a crisis. The well-known sovereign risk–bank risk link has not disappeared; it has simply shifted to stronger bank balance sheets.
“The well-known sovereign risk–bank risk link has not disappeared; it has simply shifted to stronger bank balance sheets.”
Should the factors eventually converge, the danger would multiply. A new energy disruption could push inflation and interest rates higher; a sharp correction in AI-linked firms could trigger losses and margin calls in leveraged funds; a cyber incident could simultaneously affect payments, markets, and access to liquidity; and a loss of confidence in the debt of a high-deficit country could spill over to its banks and companies. No single scenario necessarily yields a crisis. The coincidence of several of them is what turns fragility into systemic risk.
Neither complacency nor alarmism
The current indicators do not justify foretelling an imminent European financial crisis, but they also do not allow us to conclude that we can relax. The proper reading of the systemic-risk panel lies between those two extremes.
“A cyber disruption could affect payments, markets and access to liquidity simultaneously”
The observable low tension indicates that markets continue to function and that defenses built since the previous crisis have been effective. The ECB and the JERS warnings also indicate that this resilience could be put to a far more demanding test if geopolitical escalation, a fresh energy shock, an overvalued asset correction, and forced selling by leveraged intermediaries were to coincide. The cyber risk additionally introduces the possibility that an operational disruption could rapidly become a crisis of confidence.
Macroprudential policy must act precisely during calm periods. It is then that preserving banks’ capital cushions, requiring liquidity-management tools from funds, monitoring non-bank leverage, improving the transparency of private markets, and reducing fiscal vulnerabilities is less costly. Waiting for the CISS to spike would mean acting when risk has already turned into tangible tension.
The relevant question, therefore, is not predicting when the next shock will arrive. It is whether Europe will take advantage of the current calm to be better prepared when it comes.
