Euro zone banks appear to face only modest direct financial losses from the recent conflict in the Middle East, according to a top supervisor at the European Central Bank. However, that official cautioned that the bigger vulnerability for lenders is the way a weaker economy - potentially driven by higher energy costs - could feed back into credit quality and bank balance sheets.
In an extended interview, Pedro Machado, one of the ECB's senior banking supervisors, assessed exposures that European lenders hold in and around the region and outlined where supervisors are concentrating their attention. Machado said direct claims on Iran and Israel are small when compared with banks' capacity to absorb losses, but he emphasised that second-order economic effects merit careful monitoring.
Machado provided specific measures of direct exposure, noting that assets such as loans linked to those countries represent about 0.7% of core capital, and liabilities like bank bonds amount to roughly 0.6% of core capital. Including neighbouring countries, exposures still amount to slightly less than 1% of the supervised entities' total assets, he said.
To put those percentages in context, the largest euro zone banks hold a total of 27.8 trillion euros in assets, according to the latest ECB figures Machado cited. One percent of that aggregate equates to 278 billion euros.
Beyond direct credit exposure, Machado highlighted a pathway by which geopolitical tensions could translate into banking sector strain. A renewed surge in energy prices could contribute to another round of inflation and, in turn, slow economic activity. That sequence - higher energy-driven inflation, weaker growth and rising unemployment - would be consequential for banks because deteriorating labour market conditions can lead to higher default rates among 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."
Machado also discussed areas of supervisory focus beyond geopolitical risk. He downplayed the immediate relevance for European lenders of recent turbulence in U.S. private credit markets - including problems tied to a high-profile fund managed by Blackstone - saying he had not observed "any particular evidence" that it had spilled over into the euro zone banking system.
At the same time, supervisors are increasingly attentive to synthetic securitisations - transactions where banks transfer portfolio risk to third-party investors through derivatives or guarantees. These synthetic risk-transfer deals have grown rapidly, with an increase of 85% in the first half of 2025 compared with the year earlier, aided in part by regulatory changes, Machado noted.
His concern is that risks moved outside banks via synthetic structures could re-enter the banking system through indirect financing channels. To address that, the ECB intends to gather individual transaction-level information so supervisors can form an aggregate view both of volumes and of potential indirect exposures "through the back door."
That effort reflects a precautionary supervisory stance: even if direct losses from the current Middle East tensions remain limited, combinations of higher energy prices, slower growth and growing synthetic risk-transfer activity could interact in ways that increase stress on lenders.
Machado's remarks underline two supervisory priorities for the ECB: monitoring macroeconomic spillovers that affect borrowers and strengthening visibility into rapidly expanding structured transactions that may conceal indirect bank risk.