Geopolitical Risks Tighten Requirements for Credit Institutions' Risk Management

Sector News 08-04-2026

The Danish Financial Supervisory Authority (Finanstilsynet) held discussions in late 2025 and throughout 2026 with the largest credit institutions regarding their management of geopolitical credit risks. The discussed topics are generally relevant to Danish commercial and mortgage credit institutions, and we therefore share our considerations and conclusions here. The dialogue follows up on discussions with the institutions in April 2025 on how the economic and political developments in the United States affect credit risks and loan loss provisions. Those previous discussions led to a published note in June 2025, which indicated that developments in the US have increased credit risk and the need for provisions. The observations from the most recent dialogue with the institutions are described in the following sections.

Summary

Geopolitical unrest has become an important element in the risk management of many commercial enterprises and institutions.

Institutions are particularly focusing on sectors and companies dependent on exports, global supply chains, and stable energy and commodity prices. In practice, this covers mainly companies with activities in or significant dependence on China, the US, and the Middle East, most recently with a special focus on the consequences of the US and Israel's attack on Iran.

The largest institutions have strengthened their risk management through increased monitoring and regular scenario analyses and stress tests, but they also face challenges with the data foundation. Smaller institutions lack the same analytical capacity but must conduct more qualitative assessments and engage in dialogue with relevant customers.

Dialogue with individual customers is important to understand how customers are affected by geopolitical risks.

Customers have generally shown considerable adaptability and caution, but some are severely affected by geopolitical developments.

Management judgments remain significantly necessary because provision models cannot capture the full impact of the changed risk picture. Provisions must, among other things, account for the institution's assessment of the probability and effects of a prolonged and intense Iran conflict despite the recently concluded ceasefire.

1. Managing Geopolitical Unrest in Risk Management

Geopolitical unrest and its significance for credit risk have grown in recent years. Institutions highlight uncertainty regarding energy and commodity prices, disruptions to global supply chains, uncertainty about international trade terms, new or expanded tariffs and sanctions, and interventions citing national security as significant risk factors.

Institutions assess that geopolitical risks are increasingly taking on a structural character. Whereas geopolitical tensions were previously often viewed as temporary disruptions, they are now considered a more lasting and integrated part of the global risk landscape. This implies that many commercial customers have adjusted their business operations based on the consideration that geopolitical risks are here to stay.

Similarly, institutions have restructured their risk management to account for the new situation.

2. Focus on Exports, Global Supply Chains, and Energy and Commodity Prices

Institutions have strengthened monitoring of credit risks related to geopolitical unrest, with a particular focus on sectors and companies dependent on exports, global supply chains, and stable energy and commodity prices.

Institutions are particularly focusing on companies with activities in or significant dependence on China, the US, and the Middle East, where geopolitics can affect companies' supply security, profitability, and investment decisions. They make the following considerations, among others:

• China is characterized by increased uncertainty and some economic slowdown, particularly due to rivalry with the US. Chinese companies and sectors are favored (including green energy, tech, chip production, and automotive production), making it difficult for European companies to compete. The response from the US and EU has primarily been trade restrictions and tariffs, affecting both companies producing in and importing from China. Companies' analyses include, among other things, opportunities to diversify production and suppliers to other countries, particularly in Asia and Europe.
• The US is experiencing increased uncertainty regarding political and legal frameworks, partly due to unpredictable decisions, intrusive measures justified by national security, and a high risk of changes to tariffs and trade terms. This creates uncertainty for businesses and leads to considerations of shifting to other export markets, while investment decisions are postponed or reconsidered.
• The Middle East is characterized by persistent and periodically escalating conflicts, causing significant uncertainty for energy, trade, and financial markets. The region's strategic importance – particularly as a supplier of oil, gas, and fertilizer, as well as a hub for global shipping – means that regional tensions can quickly have global economic consequences. The US and Israel's attack on Iran on February 28, 2026, has caused disruptions in energy supplies and trade routes. This has led to sharply increased and volatile energy prices and freight rates, increasing pressure on companies with business models that are energy- or transport-intensive. The duration and intensity of the conflict significantly determine how severely particularly vulnerable companies, GDP, interest rates, inflation, etc., are affected – and consequently commercial and mortgage credit institutions.

The increased geopolitical risks have not led institutions to systematically change credit access for commercial customers or significantly tighten credit terms. A prolonged and intense Iran conflict, despite the recently concluded ceasefire, will affect a number of particularly vulnerable companies and the broader economy, thereby necessitating tightening. This is particularly relevant if it has long-lasting significant effects on oil and gas extraction infrastructure.

3. Strengthened Risk Management and Data Challenges

In light of geopolitical unrest, the largest institutions have strengthened their risk management through increased monitoring and regular scenario analyses and stress tests. The work is based on updated macroeconomic scenarios, including trade conflicts, sanctions, disruptions to trade routes, and energy crises. The analyses specifically target sectors and markets with particular exposure, but also consider how other customers may be affected by changes in consumer and business confidence, GDP, interest rates, inflation, etc. However, there are differences in the scope and frequency of the largest institutions' analyses.

Institutions other than the largest typically do not have the same need or opportunity to conduct extensive analyses and must therefore work more with qualitative assessments and dialogue with relevant customers.

Even the largest institutions continue to face limitations in their data foundation, particularly regarding customers' indirect exposures in value chains and dependence on sub-suppliers. Many companies thus operate across multiple countries and sectors, and their value chains can involve a large number of suppliers, sub-suppliers, and logistics partners. Value chains are also not static – companies relocate production, switch suppliers, and change logistics to adjust costs or react to market conditions. This makes it difficult to gain a comprehensive overview of where exposures actually lie, which is sufficient to assess credit risk. To compensate for this, institutions use, among other things, proxy indicators and supplementary qualitative analyses. They are also strengthening data collection and recording.

Conversely, institutions can easily monitor their allocation of increased credit facilities to each customer and customers' utilization of their facilities. Increased facilities and higher utilization can reflect elevated risk, but often do not.

4. Customer Dialogue on Geopolitical Matters

Regardless of the challenges described above, data on individual customers and their utilization of credit facilities, combined with analyses and stress tests, provide a solid foundation for institutions' dialogue with customers. Through this dialogue, institutions gain a clearer picture of how individual customers are affected by geopolitical risks and how customers are managing those risks.

5. Customers' Adaptability and Impact

Institutions assess that customers have generally shown adaptability and caution in the face of geopolitical unrest. Many companies have improved their liquidity by postponing or reducing major investments and acquisitions. Others have actively worked to geographically diversify production, suppliers, and exports to reduce dependence on specific vulnerable regions. This includes, for example, supplementing production in China with activities in Europe or Southeast Asia, and partially replacing US sales with sales in other countries. Some customers have also reduced their financial risks by hedging them with derivatives, etc.

Experiences from previous crises, including COVID-19, Russia's full-scale invasion of Ukraine, the energy crisis, and periods of significant interest rate hikes and high inflation, have strengthened companies' risk awareness, adaptability, and resilience.

Despite improved risk management, some commercial customers are also severely affected by geopolitical developments. This may be because their business model is particularly exposed to the negative developments, or because they have not responded appropriately to the changes. Some of these customers have caused institutions significant losses, while other customer relationships involve considerable loss risk. This applies, among other things, to certain companies in renewable energy production that have been hit by changes in energy prices, inflation, and interest rates, or by overly optimistic expectations.

6. Management Judgments Regarding Provisions

Institutions continuously monitor how provisions on loans, etc., should be adjusted in light of geopolitical developments. It remains the case that management judgments are significantly required because provision models cannot capture all relevant aspects of the changed risk picture.

Provisions must, among other things, account for the institution's assessment of the probability of:

• a prolonged and intense Iran conflict despite the recently concluded ceasefire
• the extent to which it will have long-lasting effects on oil and gas extraction infrastructure
• how it will, in that case, affect a number of particularly vulnerable companies and the broader economy.

Focus and Adjustment Going Forward

Geopolitical unrest places new demands on credit institutions and their risk management. Both monitoring, scenario analyses, and dialogue with customers are central tools that require continuous adjustment. Provisions must be supplemented with management judgments. Institutions must therefore remain flexible and attentive to developments to ensure robust management of these complex risks.

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