At a European Parliament committee hearing on 18 March 2026, Claudia Buch, Chair of the ECB Supervisory Board, said there was no decline in bank asset quality and non-performing loan (NPL) ratios remained stable. NPL ratios are used as an indirect measure of the financial health of borrowing firms in the EU, especially in manufacturing. Across most EU countries, manufacturing NPL ratios are at historically low levels. Countries with the highest ratios at the start of the period generally saw the sharpest falls.

Manufacturing Npl Trends Across The Eu

In most cases, manufacturing NPL ratios fell by more than half between Q2 2019 and Q4 2025. Where ratios rose over that time, the increases were generally modest. The overall fall in manufacturing NPL ratios points to improved financial health in many EU countries. This suggests the sector may be better placed to absorb the 2026 energy shock linked to the war in Iran than it was at the start of the 2022 war in Ukraine. Policy support is expected to be more limited due to budget constraints. Orders linked to defence, public infrastructure and AI may help reduce the impact on business bankruptcies and unemployment. We are seeing European manufacturing corporations face this new energy shock from Iran from a position of relative strength. Following Claudia Buch’s comments on March 18, we know bank asset quality is stable, with non-performing loan (NPL) ratios for manufacturers having fallen by more than half by the end of 2025. However, with Brent crude futures now surging past $115 a barrel, this underlying health will be severely tested in the coming weeks.

Volatility And Hedging Trade Setups

This situation points towards a spike in market uncertainty, making long volatility positions attractive. The VSTOXX index, Europe’s main fear gauge, has already climbed to 28, and we should consider buying call options or futures on it, anticipating a move towards the levels over 40 seen during the 2022 shock. At the same time, this implies downside pressure on broad indices, making put options on the Euro Stoxx 50 a reasonable hedge against long equity portfolios. The impact will not be uniform across sectors, creating opportunities for pair trades. We should look at buying put options on energy-intensive industrial ETFs, as the latest flash PMI data from March 24th already showed a dip to 45.2, citing energy costs. These short positions can be paired with call options on defence contractors like Rheinmetall, which continue to benefit from strong order books established through 2025. Beyond equities, the credit markets may be underpricing the coming risk due to the historically low NPLs. We could consider buying protection through credit default swaps (CDS) on indices tracking lower-rated European corporate debt. A sustained energy price shock will inevitably strain balance sheets, regardless of their starting point. Finally, this is a clear negative for the Euro, as the region is a net energy importer. The European Central Bank’s focus on inflation, as reiterated last week, limits its ability to soften the blow, reinforcing the case for a weaker currency. We should view any strength in the EUR/USD as an opportunity to initiate short positions. Create your live VT Markets account and start trading now.

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