By Francesco Canepa
FRANKFURT, March 5 (Reuters) – Euro zone banks face only a limited direct impact from the war in Iran, but the larger danger lies in how a weakened economy might feed back into lenders’ balance sheets, a senior European Central Bank supervisor told Reuters.
In a wide-ranging interview, Pedro Machado addressed concerns stretching from Middle East tensions to the recent wobble in private markets, while warning that a boom in complex securitisation deals merits closer scrutiny.
The threat of a broader conflict in the Middle East has sharpened fears of another inflation burst and fresh pressure on growth in the euro zone, which depends on Gulf suppliers for some of its gas and on Suez Canal routes for Asian goods.
Machado, one of the ECB’s top bank watchdogs, said euro zone banks’ direct exposure to Iran and Israel was small relative to their ability to absorb losses at 0.7% of core capital for assets, such as loans, and 0.6% for liabilities like bank bonds.
“Even if you include neighbouring countries, the exposures are pretty contained, representing slightly less than 1% of supervised entities’ total assets,” he said in an interview.
Large euro zone banks have assets worth 27.8 trillion euros ($32.32 trillion), according to the latest ECB data, meaning 1% of that would be worth 278 billion euros.
The more consequential risk, Machado added, lies in any renewed surge in energy prices feeding into inflation and, ultimately, a slowdown that would squeeze borrowers.
“In the long term if we have energy prices heating up, we might have an inflation spike with recessionary potential impacts in terms of economic activity,” Machado said. “And this translates into a potential impact on unemployment, which is a variable that is quite important for banks.”
SHADOW BANKS IN FOCUS
Machado downplayed the relevance for European lenders of the recent turbulence in U.S. private credit – most recently at Blackstone’s flagship fund – saying he had not seen “any particular evidence” of spillover.
But he said the ECB was sharpening its focus on synthetic securitisations, in which banks shift portfolio risks to outside investors using derivatives or guarantees. Supervisors want to ensure the risk does not boomerang back into the banking system through indirect financing channels.
“We intend to collect individual information on those transactions to then try to have a much more aggregate view on those, both in terms of volume but also in terms of potential exposure through the back door,” he said.
Synthetic risk-transfer deals have been booming, rising 85% in the first half of 2025 from a year earlier, helped by changes in regulation.
($1 = 0.8602 euros)
(Editing by Kirsten Donovan and Nick Zieminski)
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