The European Parliament has approved a ‘White Paper on the Future of European Defence’ that calls for financial tools – including a dedicated Defence, Security and Resilience Bank (DSRB) – to fortify the EU’s security posture. The announcement signals a major shift in how Europe plans to finance its defence needs.​

The paper is responding to a convergence of crises: Russia’s war on Ukraine has upended the post-WWII European peace order, the US is reconsidering its commitments (with recent US policy signals suggesting Europe must be prepared to shoulder more of its defence burden​), and rising powers like China are challenging the rules-based order and arming rivals​.

Within this context, Europe urgently needs to strengthen its defence capabilities and resilience, which means the Bloc’s leaders must find innovative ways to finance a defence build-up, bolster the continent’s defence industrial base, and recalibrate geopolitical relationships – all without undermining fiscal stability or the broader economy.

No small task.

An €800 billion challenge

Europe’s defence ambitions require massive investment. Estimates put the additional funding need in the range of €500–800 billion, a level European states cannot simply reallocate from existing budgets or raise through conventional debt without sacrifice. High public debt levels after recent crises mean many governments are fiscally constrained, unwilling or unable to borrow large sums on the market for defence.

In short, traditional funding approaches are insufficient.

Rob Murray, former Head of Innovation at NATO and founder of the DSR Bank, said, “The DSR Bank is a strategic, credible, and market-based solution to the grave security challenges facing Europe which ensures we can defend democracy without undermining economic stability. The DSR Bank is a key weapon in the armoury of European governments who want to strengthen their defence capabilities but are held back by debt limits and fiscal constraints. It is welcome that the DSR Bank has won the support of the European Parliament.”

The new paper urges member states to support establishing a DSRB as a multilateral lending institution to provide low-interest, long-term loans for critical security priorities and effectively act as a dedicated development bank for European defence and security needs.

As a multilateral bank capitalised by its member governments, a DSRB would likely enjoy a AAA credit rating, which would allow it to issue debt and lend to governments for defence projects on very favourable terms​.

More important, however, is the notion that borrowing from such an institution would be treated as “contingent liabilities” on national balance sheets. Effectively, it is off-balance-sheet financing that does not add to a government’s official debt stock​, allowing nations to maintain fiscal discipline on paper while actually deploying fresh capital into defence.

As a result, a multilateral defence bank can dramatically increase the money available for defence without increasing the risks associated with greater national debt or the political and market backlash that might accompany a massive debt-funded military buildup.

Considering the supply chain

A key challenge in rapidly expanding defence production is ensuring that all suppliers, even those deep down the chain, have the liquidity to fulfil larger orders.

Defence supply chains are complex.

A prime contractor (say, an aerospace giant) relies on hundreds of smaller suppliers for components, materials, and services. If those tier-2 and tier-3 suppliers cannot access working capital to buy raw materials or ramp up capacity, they become bottlenecks, no matter how much money governments throw at the primes.

Currently, many smaller firms in critical defence supply chains are cash-constrained. They often face lengthy payment cycles on government contracts (where payment may come only upon delivery or milestone) and struggle to get affordable bank financing in the interim. Traditional lenders have been reluctant to support defence-sector SMEs, citing compliance burdens and reputational risk, especially when contracts are unpredictable or classified​.

This creates a dangerous vulnerability: without liquidity, smaller suppliers cannot quickly scale up production, directly limiting Europe’s capacity to arm itself in an emergency​. Thankfully, deep-tier supply chain finance may be able to help.

Rebecca Harding, CEO of the newly created Centre for Economic Security, said, “The DSRB is an attractive way for governments to increase their defence to critical national infrastructure starting with defence and security. It provides a solution that will work, via Guarantees, to get to where support is really needed – in deep tier supply chains – to make them more effective through efficient supply chain finance. We live in challenging times and this is exactly the right institutional response.”

Deep-tier supply chain finance is an innovative model that unlocks financing for lower-tier suppliers (often SMEs) by leveraging the credit strength of larger, creditworthy anchor buyers​. In practice, this means a small subcontractor can borrow against the payment approval of a major defence contractor or government, receiving immediate cash at the more favourable rates tied to the anchor’s stronger credit, pushing liquidity down the chain to where it’s needed most.

Where does a DSRB come in?

The proposed DSRB can play a catalysing role here. By providing risk guarantees or insurance to commercial banks for defence-related loans (akin to how the European Bank for Reconstruction and Development operates), the DSRB would make it much more palatable for banks to extend credit to defence suppliers​.

With a DSRB guarantee in hand, banks can finance an SME subcontractor’s purchase of, say, specialised machine tools or materials for missile production, confident that even if something goes awry (cancellation, geopolitical issues), their loan is protected.

Many private banks have indicated that they would be keen to lend to defence companies if a multilateral institution stands behind the deal​. We can expect the DSRB to issue such guarantees and perhaps work with export credit agencies to funnel capital into the defence supply chain​.

Sean Edwards, Chairman of ITFA, pointed to the statement released by ITFA, which said, “Paragraph 80 of the White Paper rightly calls for the establishment of a dedicated Defence, Security, and Resilience Bank (DSRB). This institution will not only provide vital financing for Europe’s security needs but will also employ supply chain finance techniques, particularly deep-tier finance, to reinforce the resilience of military supply chains, which are often more fragile than they appear. Ensuring liquidity at every level is critical. This represents a strategic opportunity for the trade finance community—not only to enhance security and stability in Europe but also to develop an underbanked asset class with significant potential. ITFA encourages its members to explore these opportunities.”

Investment in defence supply chains will also have positive spillover effects beyond military might. Such spending will stimulate other high-value industries, such as aerospace, electronics, cybersecurity, shipbuilding, and more. In the long run, this can lead to less reliance on foreign suppliers, more intra-European trade, and potentially export opportunities if European defence firms become more competitive globally.

But these hypothetical benefits will remain hypothetical without a seamless execution.

Money must flow to the right places quickly, which is why supply-chain financing tools and the DSRB’s agile funding are so crucial. If Europe succeeds, its defence renaissance could become a driver of economic renewal, especially in regions with defence industries.

Geopolitical shifts creating the need for strategic autonomy

For decades, Europe’s defence posture has been sheltered under the US umbrella via NATO. Now, with uncertainty about US engagement (exacerbated by the possibility of US policy retrenchment​), European leaders are seeking strategic autonomy and the ability to deter threats and act in crises with less dependence on Washington.

This is one of the reasons why the very nature of the proposed DSRB is multilateral. The bank is envisioned to include EU members and willing non-EU states (the UK is a prime candidate), leveraging London’s unique strengths in finance and defence​. Similarly, other NATO allies or partner nations (Norway, possibly Canada, etc.) might participate, pooling resources for collective security.

Geopolitically, the establishment of a defence bank and common funding tools shows that Europe is backing its strategic commitments with concrete financial power, effectively securitising its security needs. The implication is that Europe’s defence is becoming entwined with global finance.

In modern geopolitics, fiscal capacity and financial engineering can be as vital as troop counts and tanks. A credible financial commitment to collective defence can deter adversaries by showing that Europe can and will spend what it takes to prevail in a protracted conflict.