Integrating geopolitical considerations into banks’ risk management frameworks

In an increasingly fragmented and unpredictable environment, geopolitical risk can no longer be treated as a distant or abstract concern. For Luxembourg banks, which are open, international and deeply interconnected, these risks are immediate, tangible and systemic.

In the ABBL Annual Report 2025, Alexandre Depouhon, Chief Risk Officer at Banque Raiffeisen, S.C. and Chairman of the ABBL’s Banking Supervision Committee, explains why banks must move from awareness to structured action by embedding geopolitical considerations into their risk management frameworks.

A systemic risk for an interconnected financial centre

Geopolitical tensions now express themselves through multiple channels: economic fragmentation, sanctions, technological decoupling and growing exposure to critical infrastructures.

These developments do not create a completely new category of risk. Rather, they act as powerful accelerators, amplifying existing vulnerabilities across credit, market, liquidity, operational and cyber risk.

For Luxembourg banks, this reality is particularly relevant. The financial centre is deeply international by nature, and certain critical infrastructures and service providers play a central role in the ecosystem. While these actors support efficiency and innovation, concentration can also create potential vulnerabilities in times of geopolitical stress.

From awareness to structured action

Faced with this reality, banks must move from awareness to structured action. The first step is clarity: identifying and mapping exposures with precision.

This means understanding where risks lie across geographies, sectors, counterparties and service providers, while also recognising hidden concentrations and critical dependencies. Recent regulatory developments, including DORA, provide a useful framework to better capture these interconnections, particularly in the area of ICT and third-party risk.

But identification alone is not enough. What matters is the ability to assess materiality and translate it into decision-making.

Geopolitical considerations must therefore be embedded into the core of risk governance: risk appetite frameworks, client onboarding, investment policies, lending decisions and outsourcing strategies. They must inform not only what banks do, but also how they do it and where they choose to operate.

Stress testing must evolve

Geopolitical risk must also be reflected in banks’ forward-looking exercises. In adequacy processes such as ICAAP and ILAAP, relying solely on traditional macro-financial assumptions is no longer sufficient.

Institutions must explicitly consider how geopolitical tensions could affect their capital and liquidity trajectories, as well as the evolution of their risk profile. This means assessing, in practical terms, the potential impact of disrupted funding structures, sanctions, the failure of a critical supplier or the fragmentation of cross-border activities.

Stress testing must therefore evolve in both nature and ambition. Banks are increasingly expected to consider scenarios that reflect the realities of our time: prolonged disruptions affecting critical ICT providers subject to extraterritorial constraints, regional energy shocks with systemic consequences, or the sudden closure of key trade or payment corridors.

These scenarios should not remain theoretical. They must be anchored in operational reality and aligned with recovery plans and business continuity arrangements.

Beyond prudential exercises

In other words, beyond prudential exercises, geopolitical risks must be incorporated into internal practices.

Resilience is not only a matter of frameworks and methodologies. It is also a matter of governance and culture. It requires engaged and informed leadership, capable of challenging assumptions and anticipating change.

It also calls for enhanced situational awareness, regular simulation exercises and a continuous effort to diversify exposures and strengthen operational robustness. In times of uncertainty, resilience is built not only through rules, but also through mindset.