A Roadmap for Banks to Geopolitical Risk Taxonomy

As part of our ongoing series on the ECB’s 2026 Geopolitical Reverse Stress Test, we previously explored why channels matter more than numbers and how geopolitical risk shapes failure pathways in reverse stress testing.

Why This Matters

A key objective of the ECB’s 2026 Reverse Stress Test is for banks to assess the resilience of their business model. This requires a comprehensive taxonomy of geopolitical risk drivers linked to business impact via plausible transmission channels. Without this foundation, reverse stress testing becomes guesswork, blind to hidden vulnerabilities and hard to defend under supervisory scrutiny.

Step 1: Identify and Engage the Right Stakeholders

Creating a useful taxonomy is not a siloed exercise. It requires bringing together a cross-functional working group: risk management to define categories and metrics, treasury and finance to assess balance sheet sensitivities, business lines to validate exposures, geography and concentrations, compliance and legal to capture sanction regimes and regulatory constraints. Early engagement ensures the taxonomy reflects the bank’s unique business model and risk profile.

Step 2: Structure the Taxonomy Using a Layered Approach

The starting point is to move from broad geopolitical themes to tangible impacts. Begin by identifying high-level drivers such as sanctions, trade fragmentation, energy disruption or military escalation.

From there, think about how these drivers ripple through the organization—through financial markets, the real economy, and safety & security. The goal is to connect these channels to your business model and balance sheet exposures, and then drill down to measurable risk parameters like PD/LGD shocks or market sensitivities.

Step 3: Apply Robust Modelling Approaches and “Reverse-Orientation”

Once the taxonomy is defined, the next step is to make it actionable. Start with scenario-based analysis to explore plausible geopolitical shocks and their effects across channels. Then, use sensitivity screening to identify which sectors and counterparties are most exposed.

It is not uncommon for this exercise to yield a constellation of viable assumptions leading to the desired outcome; quantitative methods, such as Monte Carlo simulations or optimization methods, can aid in exploring the solution space and guide in the choice of the scenario which best fits the profile and narrative of your organization. The aim is not to build the most complex model but to ensure the taxonomy translates into meaningful insights for decision-making.

Step 4: Leverage External Data and Benchmarks

No taxonomy should be built in isolation. External data adds credibility and depth. Regulatory guidance from the ECB provides a clear baseline, while industry benchmarks and rating agency data can help calibrate sector sensitivities.

Geopolitical risk indices and historical stress events offer valuable context for scenario design. Combining internal insights with external references ensures your taxonomy reflects both supervisory expectations and real-world dynamics.

Step 5: Establish Governance and Documentation

Finally, governance is what turns a taxonomy into a trusted framework. This means securing board-level oversight, involving cross-functional committees, and maintaining clear documentation of assumptions and methodologies.

Regular updates are essential, as geopolitical risks evolve. A well-governed process not only satisfies regulatory scrutiny but also embeds the taxonomy into the bank’s risk culture, making it a living tool rather than a one-off exercise.

How Zanders Can Help

We guide banks through this process end-to-end:

• Quantitative modeling to support or benchmark scenario design.
• Advisory support to design and validate a complete taxonomy.
• Hands-on assistance during stress test exercises, leveraging experience with European banks.
• Tooling development or deployment of our Credit Risk Suite (CRS) for scenario modeling, automated ECL/CET1 impact calculations, and advanced optimization techniques.

Transform compliance into strategic capability for resilience. Contact us to find out how we can help your organization.