European banks closed 2025 on solid footing. Capital ratios were at record highs, liquidity buffers nicely exceeded regulatory minima, and profitability remained robust. However, as we now kick off 2026 the sector is navigating elevated geopolitical and trade uncertainty, a shift in liquidity composition toward sovereign assets and rising operational risks from cyber threats and AI enabled fraud.
EBA’s latest Risk Assessment Report (December 2025) reminds us that last year’s resilience came with challenges and a good set of guidelines of what the European Banking sector should look into this year.
2025 in Hindsight
The EU/EEA faced significant macroeconomic and geopolitical uncertainty, while simultaneously pursuing global competitiveness. Throughout 2025, banks played a central role: they provided lending to productive sectors, supported innovation and decarbonisation, and financed defence‑related needs under prudent origination standards. The sector maintained strong asset quality—NPL ratios remained near historic lows and coverage stayed stable—while Stage 2 allocations rose, reflecting a cautious stance rather than realised losses. Sovereign spending trended higher amid geopolitical and socio‑economic pressures; banks increased sovereign holdings within their assets and liquidity buffers, which heightened sensitivity to market volatility and fiscal dynamics.
In response to the geopolitical backdrop, banks deepened scenario planning, formalised governance, and embedded crisis playbooks into risk frameworks. They relied increasingly on qualitative assessments to complement quantitative indicators, and expanded internal intelligence around geoeconomic risks. Operationally, cyber threats—especially DDoS and ransomware—remained elevated, outsourcing introduced concentration channels, and the emerging risk of quantum‑enabled attacks entered long‑term resilience planning. Funding stayed stable through a healthy mix and disciplined issuance whenever market windows opened; deposits continued to anchor liability structures, and profitability held up thanks to fee income and cost control. Capital ratios reached record levels, and banks managed distributions prudently while preparing for CRR3/CRD6 phase‑in impacts.
Risk Mitigation: What Banks Should Do Now (2026)
Maintain disciplined, targeted lending to productive sectors—energy transition, utilities, technology, and defence—using prudent origination standards and clear sector concentration limits. Why: Supports EU competitiveness and sustainability goals while controlling portfolio risk
Manage sovereign exposure and LCR composition cautiously: diversify HQLA away from single‑country concentrations, monitor duration/OCI sensitivity, and stress sovereign spread shocks and FX liquidity (especially USD). Why: Rising debt and political volatility can widen spreads and reprice buffers
Explicitly integrate geopolitics into ICAAP/ILAAP and stress tests: use qualitative scenarios and expert judgement alongside quantitative indicators; keep crisis playbooks updated for worst‑case geopolitical events. Why: Quantitative tools have backward‑looking limits; qualitative foresight improves preparedness.
Strengthen operational resilience beyond DORA: run regular red‑team/DDoS drills, tighten outsourcing/cloud contracts and monitoring, deploy advanced anti‑fraud and AI‑governance controls, and begin crypto‑agility/quantum‑readiness planning. Why: Threats remain high and are increasingly technology‑enabled; third‑party chains can amplify shocks.
Keep conservative credit provisioning and transparent Stage 2 practices: apply forward‑looking indicators and overlays; enhance early‑warning for SMEs and CRE; ensure supervisor‑friendly disclosure. Why: Elevated Stage 2 indicates caution; forward‑looking transparency reduces model risk.
Monitor and limit concentration in NBFI exposures, especially in third countries: analyse maturity mismatches and leverage channels; set counterparty/sector caps and collateral standards. Why: NBFI linkages are opaque and can transmit volatility quickly.
Preserve funding resilience: keep deposits central, maintain free collateral for securitised/funding backstops, and use issuance windows across the capital stack to meet MREL/CRR3 needs at sensible costs. Why: Market conditions can turn abruptly; pre‑positioned options protect liquidity.
Defend profitability while investing in efficiency: expand fee‑based services (payments, custody, asset management), deploy automation to control costs, and assess M\&A only when it strengthens earnings quality and resilience. Why: Lower‑rate NII pressure demands diversified revenues and disciplined cost bases.
Plan capital prudently through CRR3/CRD6 phase‑in: communicate output‑floor and op‑risk trajectories to investors, align payout policies to sustain confidence while preserving buffers for uncertainty. Why: Transparent capital roadmaps underpin stable valuations and funding access.