Europe’s banking sector has entered 2026 on firm ground, bolstered by strong capital buffers and liquidity despite escalating geopolitical tensions in the Middle East. The European Banking Authority’s Q4 2025 Risk Dashboard, released this week, confirms that the EU/EEA banking sector remains robust, with strong capitalisation, ample liquidity and solid asset quality, even as global economic uncertainty rises following renewed conflict in the Middle East.
STRONG CAPITAL BUFFERS
Risk-weighted assets for EU and EEA banks climbed modestly by just over 1% in 2025, reaching €10.2 trillion, yet the common equity tier 1 (CET1) ratio held steady at 16.3%. The EBA said capital buffers and profitability remain banks' first lines of defence. Return on equity held steady in double digits at 10.4%, compared with 10.5% in December 2024. Net interest margins, after declining from 1.66% in December 2024 to 1.58% in September 2025, edged up to 1.6% in the fourth quarter, hinting at a potential floor to compression pressures.
The cost-to-income ratio rose to its highest level since March 2023, reflecting rising costs and seasonal effects.
LIMITED MIDEAST EXPOSURE
Direct exposure to Middle East counterparties totaled €132 billion at year-end 2025, including around €47 billion in loans and advances to banks and other financial corporations and around €33 billion to non-financial corporates. This represents less than 0.5% of total EU/EEA banking assets—a modest figure in isolation. The EBA said an escalation of tensions could generate second-round effects, notably via higher energy prices, inflationary pressures, weaker global economic growth and disruptions to supply chains, particularly in energy-intensive sectors such as transport, construction and certain manufacturing segments.
Total assets remained stable at €29.1 trillion, while outstanding loans increased by more than 1%, driven mainly by residential real estate-backed loans and financing to small and medium-sized enterprises.
ASSET QUALITY HOLDS FIRM
Non-performing loan (NPL) volumes dipped to €370 billion, maintaining a stable ratio of 1.8%. Stage 2 loans, early indicators of credit stress, fell to 9.1% from 9.3% in the prior quarter. The EBA said this points to an improvement in asset quality ahead of any potential deterioration linked to geopolitical tensions and global supply chain disruptions.
LIQUIDITY AS KEY DEFENSE
The liquidity coverage ratio (LCR) rose to 163.1% from 160.7% in Q3 2025. Household deposits rose 1.8% and non-financial corporate deposits 3.6% over the final quarter of the year, offsetting declines in deposits from other credit institutions and in other liabilities, including deposits from central banks.
The net stable funding ratio (NSFR) increased to 126.9%, while the loan-to-deposit ratio continued its downward trend, reaching 104.8%.
REGULATORY SHIFTS AHEAD
Complementing the Risk Dashboard, the EBA unveiled its CRR3 and CRD6 dashboard, projecting capital trajectories through 2030. Under fully loaded CRR3 implementation, the average CET1 ratio would slightly decrease to around 15.3%, reflecting an average 4.7% relative increase in Tier 1 minimum required capital once the output floor is fully phased in. The number of institutions bound by the output floor is projected to rise from two at end-2025 to 33 under full implementation; under a static balance sheet, a total capital shortfall of €424.8 million would first emerge in 2030, rising to €12.7 billion once the output floor is fully implemented.
The EBA said this gives banks ample time to adjust. CRR3 began to apply on January 1, 2025.
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