The Proximity Penalty_ Why European Banks are Redefining Risk

For years, European banks treated geopolitical tension like a sudden thunderstorm—something that passes, leaves a bit of damage, and eventually clears up. But that mindset is officially a thing of the past. Today, the continent’s financial giants are treating geopolitical instability not as a temporary headache, but as a permanent, structural feature of their daily business. The catalyst for this shift is something experts call the proximity penalty. While American banks might view a conflict across the ocean as a distant concern, European institutions are right in the blast zone. Conflicts in Ukraine or the Middle East aren't just headlines to them; they are immediate disruptions to supply chains, energy prices, and the core of European trade. When the world catches a cold, Europe often catches the flu. This shift changes everything about how money is managed. Geopolitical shocks act as brutal supply shocks. They simultaneously shrink economic output while forcing inflation upward, putting banks in a difficult position where central banks are forced to keep interest rates high

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