There is currently no institution that can deploy capital strategically, rapidly and across borders when markets cannot, writes Rebecca Harding.
Credit markets are flashing red and capital is retreating from risk. If this continues, global credit conditions could deteriorate fast. Defence industries, which rely heavily on high-yield debt and specialised financing, will be among the first to feel the pain. Supply chains will seize up. Strategic programmes will slow and sovereign borrowing costs rise. In short: the financial foundations of deterrence are exposed, just as the world becomes more dangerous.
EU finance ministers met in Warsaw on 11 and 12 April – joined by counterparts from the UK and Norway – as financial volatility and geopolitical uncertainty converged. The gathering was an opportunity to manage the risks of today and shape the institutions of the future. Proposals discussed included the establishment of a “European Defence Mechanism” for defence-related lending and cooperation with non-EU countries.
The ministers should also consider other critical initiatives while they continue their discussions in the coming months. The EU, alongside other European countries, Canada, Australia and Japan, should co-design a new multilateral institution — the DSR (defence, security and resilience) Bank — capable of financing long-term resilience and defence at scale.
The initiative is already gaining momentum. In Brussels, the European parliament has called for its creation — explicitly urging member states to support the DSR Bank. UK chancellor Rachel Reeves recently added her voice. The political foundation is now in place. Europe, and particularly the UK, should not hesitate.
The logic is simple but urgent. Europe and its allies need to rebuild defence capacity fast. That means increasing armaments production to deter Russian aggression, securing supply chains and investing in the critical infrastructure that enables credible military capability. The economic backbone of these efforts — particularly in defence manufacturing and munitions — is exposed to tightening credit conditions. If liquidity dries up, production will slow, deliveries falter and deterrence weaken.
Greater co-ordination in defence investment is essential. Fragmented national procurement strategies dilute demand signals and drive up costs. The DSR Bank would provide an incentive structure to support joint procurement and common capability development. By providing guarantees and aligning funding, it would help scale industrial output while reinforcing political cohesion among like-minded nations.
The only way to close this gap is to unlock large-scale capital for production. Otherwise, rising demand for weapons will outpace supply — and trigger higher prices. If nations are forced to re-arm in this way, we risk stoking defence-driven inflation that could trigger broader instability. The DSR Bank would act as a supply-side enabler, helping companies and governments borrow, invest and scale production, keeping procurement affordable.
The European Commission’s €150bn ReArm package is a strong signal that Brussels understands the challenge. It is a necessary accelerant, not a permanent boost. What is missing is a standing institution to deploy capital strategically, rapidly and across borders when markets cannot.
The DSR Bank would offer guarantees, blended capital structures and, where appropriate, first-loss tranches or subordinated debt. This would crowd in private investment and stabilise fragile supply chains. It would target strategically valuable sectors where private capital is scarce: armaments production, defence manufacturing, secure communications, logistics networks and critical infrastructure.
Crucially, it would not stop at the EU border. Canada, Australia and Japan are natural co-founders. The UK, a cornerstone of European and transatlantic defence, must be closely involved. The DSR Bank must be multilateral in ambition, even if it begins with European initiatives. Deterrence is a shared asset — and a shared responsibility.
This is not simply a matter of financial engineering. It is about strategic power and the front line of geopolitical competition. Resilience and credible deterrence are now inseparable.
Rebecca Harding is a trade economist and Chief Executive of the Centre for Economic Security.
This article was first published in the Financial Times on 9 April 2025 under the title: “Now is the moment for a multilateral defence bank”.