EU Banking Sector Braces for Geopolitical Storm From Fortress Position

Global economic uncertainty has risen following renewed conflict in the Middle East, but the European Banking Authority's latest quarterly assessment shows the EU/EEA banking sector remains robust, with strong capitalisation, ample liquidity and solid asset quality.

The EBA published its Q4 2025 Risk Dashboard on 23 March. The common equity tier 1 (CET1) ratio (transitional under CRR3) remained stable at 16.3%. Return on equity held steady in double digits at 10.4%, while non-performing loan volumes declined slightly to €370 billion, keeping the NPL ratio stable at 1.8%.

Liquidity conditions have strengthened further, with the liquidity coverage ratio rising to 163.1%, well above the 100% regulatory requirement. Banks with an LCR above 140% account for more than 80% of the total. The net stable funding ratio climbed to 126.9%, while the loans-to-deposit ratio continued its downward trend to 104.8%. Banks continued to focus on deposits in their funding mix.

GEOPOLITICAL EXPOSURE LIMITED

Direct exposures to counterparties located in the Middle East totalled €132 billion at end-2025. This represents less than 0.5% of total EU/EEA banking sector assets, which the EBA describes as limited. The exposures break down to approximately €47 billion in loans to banks and other financial corporations, and €33 billion to non-financial corporations.

Yet the EBA cautioned that 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.

REGULATORY TRANSITION AHEAD

For the first time, it accompanies the new Capital Requirements Regulation and Directive (CRR3/CRD6) dashboard, replacing the former Basel 3 monitoring report. The new dashboard provides forward-looking projections of key capital metrics across the output floor implementation period (2025 to 2030) and under the fully loaded framework.

Under the fully-loaded CRR3 implementation, the average CET1 ratio would slightly decrease but remain robust at around 15.3%. The number of institutions bound by the output floor is projected to increase from just two at December 2025 to 33 by full implementation. Under the static balance sheet assumption, no capital shortfalls would emerge before 2030. At that point, the total capital shortfall is projected at EUR 424.8m, rising to €12.7 billion once the output floor is fully implemented.

The EBA said capital buffers and profitability remain banks' first lines of defence.