Defense industry executives, politicians and senior bankers alike are now calling for an urgent revamp of regulations and internal processes to make it easier for banks to quickly channel funds into arms manufacturers and military contractors.
“Many defense firms have had trouble with simple things like getting a bank account,” said Florian Seibel, the co-founder of Quantum Systems, a maker of surveillance drones that operates in Ukraine. “At a working level the bank staff will say ‘of course we should finance this defense project.’ But then the deal is blocked as it goes against some internal rule.”
It’s a frequent refrain from European defense startups working on everything from new drone technologies to advanced surveillance equipment. Their experience shows that the ways banks do business in some of Europe’s biggest markets don’t match the political moment.
The urgent need to ramp up Europe’s military defenses was laid bare during a now infamous Oval Office meeting, in which Ukraine President Volodymyr Zelenskiy was publicly berated by President Donald Trump. The US has since suspended military aid to Kyiv.
European leaders are now rallying around Zelenskiy, pledging hundreds of billions of euros in support. European Commission President Ursula von der Leyen has declared this a “watershed moment.”
The rapid turn of events has taken European banks by surprise. The industry has been accustomed to treating arms manufacturers as a reputational liability, thanks to rules designed to weed out high-risk clients or to discourage lending to sectors that clash with ESG (environmental, social and governance) metrics.
“Unless a number of tangible levers are pulled,” Europe will struggle to finance a new wave of defense growth, Fabrizio Campelli, a top executive at Germany’s biggest lender, Deutsche Bank AG, said at a recent conference in Frankfurt.
Europe should be “simplifying and harmonizing” some of the definitions of sustainable finance to make defense a “more bankable” sector, Campelli said.
So far, however, progress appears to be slow.
Patrick Schneider-Sikorsky, partner at NATO Innovation Fund, said he’s seen plenty of examples to indicate the political mood has yet to filter through to banks. In a recent report, NIF found that defense companies continue to face a “significant barrier” when seeking financing from the private sector, with both asset managers and banks citing ESG restrictions that mean arms manufacturers get treated as “sin stocks.”
It’s a trend that Morningstar DBRS confirmed in a recent report, citing hurdles posed by the EU taxonomy system.
As Europe struggles to create the financial conditions for a thriving defense industry, it’s a very different picture in the US. Since Russia’s invasion of Ukraine in February 2022, the biggest providers of bonds and syndicated loans to the defense industry are all US banks, according to data compiled by Bloomberg.
JPMorgan Chase & Co. leads the Bloomberg league table, having provided more than $28 billion in the period, the data shows. It’s followed by Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley. The highest-ranked European bank is BNP Paribas SA, in ninth place, the data shows.
Spokespeople for Deutsche Bank and Commerzbank AG said the data doesn’t reflect large chunks of the financing done in Europe, where loans tend to be directly allocated to smaller and mid-sized firms. Commerzbank holds a “disproportionately strong” position in Europe’s defense sector, the lender’s spokesperson said.
And established companies like Rheinmetall AG, whose bank relations pre-date ESG rules, have little difficulty accessing financing.
For smaller companies, however, it continues to be an uphill struggle.
It’s “a huge issue in Europe that I see American startups are not facing,” said Jan-Hendrik Boelens, a former colleague of Seibel’s at Quantum Systems who recently started his own company, Alpine Eagle. The firm uses aircraft and tech to intercept drones.
“We’re still fighting with the banks,” he said.
Boelens says he’s been handed questionnaires from European banks in which he’s asked to confirm that he doesn’t work in a non-ESG-compliant business, a category that lumps defense in the same basket with porn. It’s “the same thing to the bank,” he said.
Balazs Nagy, co-founder and CEO of Tytan Technologies, which develops counter-drone technology, said it took his company “more than 12 months to even open a bank account.” Tytan was being turned away despite having secured a grant from the state of Bavaria. The company finally got an account with Deutsche Bank in late 2024, Nagy said.
A spokesperson at Deutsche Bank declined to comment on the process described by Tytan. A spokesperson for Germany’s bankers’ association, BdB, said the group isn’t aware of any shortage of bank financing for the defense industry.
Germany’s top politicians, meanwhile, have made clear they think banks need to do more. Finance Minister Joerg Kukies has publicly suggested that banks pay less attention to ESG standards and do more to support defense companies.
The European Investment Bank is now looking into having its mandate expanded to give it more leeway to finance military projects. And Germany’s state development bank, KfW, is set to play a major role in ratcheting up defense spending.
“Defense companies can apply for funding supplied by KfW’s general programs,” the lender said in an emailed response to questions. “The federal government can at any time make investments in defense companies through allocations, which will be carried out by KfW.”
Seibel from Quantum Systems says he’s now seeing early signs of change in the financial sector. He recently formed Stark Defense, another Munich-based startup, which makes kamikaze drones — unmanned aircraft designed to attack. He quickly drew venture capital backing.
Until recently, “only a few banks like Commerzbank were open for business,” Seibel said. Now others are starting “to be more open to supply defense financing.”
--With assistance from Laura Alviž, Arne Delfs and Amy Thomson.
