The European Banking Authority (EBA) said on Friday that the war in Ukraine would have a limited impact on European banks initially but there were clear medium-term risks.

“First-round (direct) risks stemming from the Russian invasion of Ukraine are not a fundamental threat to the stability of the EU banking system but second-round (indirect) effects may be more material,” the EBA said in its latest risk report.

It said European banks’ direct asset exposures to Russia, Ukraine and Belarus were concentrated in just a few countries and a limited number of banks, mostly through their subsidiaries in these countries. But it warned the war could have more significant consequences in the longer term on banks in the European Economic Area – the EU, Iceland, Liechtenstein and Norway. 

Banks would be affected by “lower economic growth”, which could reduce demand for loans, the EBA said.

Western sanctions on Russia and Belarus could hinder clients’ ability to service their bank loans, as could counter-sanctions imposed by Moscow and Minsk.

Market volatility, the impact of the war on supply chains and the risk of cyberattacks were also factors of concern, it added.

In the fourth quarter of 2021, European banks reported exposures – loans, advances and debt securities – of €76 billion towards Russian counterparties and €11 billion towards those in Ukraine.

Austrian, French and Italian banks reported the largest exposure towards Russia, while Austrian, French and Hungarian banks had the highest exposure towards Ukraine

Austrian, French and Italian banks reported the largest exposure towards Russia, while Austrian, French and Hungarian banks had the highest exposure towards Ukraine.