TGB Regional Banking Monitor: Europe — Q1 2026

The regional picture

Europe's monetary stance changed character during the first quarter of 2026. In early February most of them were holding rates, and some still expected to ease further. The ECB kept its three key rates unchanged on 5 February, with the deposit facility rate at 2.00%. The Bank of England held Bank Rate at 3.75% at its meeting ending on 4 February by a 5–4 vote, with four members preferring a cut to 3.5%, and said Bank Rate was likely to be reduced further. Norges Bank kept its rate at 4% on 21 January and said it would be reduced further in the course of the year if the economy evolved as envisaged. The Czech National Bank held its two-week repo rate at 3.50% on 5 February. Hungary's Monetary Council cut its base rate by 25bp to 6.25% on 24 February.

The outbreak of conflict between Israel and the United States, and Iran, after the Bank of England's February meeting changed the backdrop. The Bank of England's Financial Policy Committee recorded that shipping through the Strait of Hormuz had effectively ceased, that Brent crude had reached more than 60% above its pre-conflict level and fluctuated above $100 per barrel, and that European and UK gas prices were more than 70% higher. From pre-conflict levels, 2-year government bond yields had risen by 72bp in Germany and 100bp in the UK, and 10-year yields by 43bp and 74bp respectively.

None of the seven central banks covered in this monitor changed rates in March. The ECB held on 19 March and said the war had created upside risks for inflation and downside risks for growth. The Bank of England's Monetary Policy Committee voted unanimously for no change at its meeting ending on 18 March. The Swiss National Bank kept its policy rate at 0% on 19 March and said its willingness to intervene in the foreign exchange market had increased. The Riksbank held at 1.75% in a decision notified on 19 March. The Czech National Bank held at 3.5% on 19 March with all seven members in favour, and Hungary's Monetary Council held at 6.25% on 24 March. Norges Bank kept its rate at 4% on 25 March but said it would likely be appropriate to raise it at one of the forthcoming meetings. For the Bank of England and Norges Bank, March marked a shift from expecting further easing to weighing the inflationary effects of the energy shock.

Central bank decisions in Q1 2026

Source: European Central Bank, Combined monetary policy decisions and statement, 5 February 2026, 5 February 2026; European Central Bank, Combined monetary policy decisions and statement, 19 March 2026, 19 March 2026; Bank of England, Bank Rate maintained at 3.75% - February 2026 Monetary Policy Summary and Minutes, 5 February 2026; Bank of England, Bank Rate maintained at 3.75% - March 2026 Monetary Policy Summary and Minutes, 19 March 2026; Swiss National Bank, Monetary policy assessment of 19 March 2026, 19 March 2026; Sveriges Riksbank, Policy rate decision (notified on 19 March 2026), 19 March 2026; Norges Bank, Policy rate kept unchanged at 4 percent (January 2026), 22 January 2026; Norges Bank, Policy rate kept unchanged at 4% (March 2026), 26 March 2026; Czech National Bank, CNB Board decisions, 5 February 2026, 5 February 2026; Czech National Bank, Statement of the Bank Board for the press conference following the monetary policy meeting, 19 March 2026, 19 March 2026; Magyar Nemzeti Bank, Press conference following the Monetary Council's decision on 24 February 2026, 24 February 2026; Magyar Nemzeti Bank, Press conference following the Monetary Council's decision on 24 March 2026, 24 March 2026.

Euro area: policy on hold, balance sheets strong

Policy and credit

Euro area inflation was below target at the start of the year, and the ECB left policy unchanged at both of its meetings in the quarter. Euro area inflation fell to 1.7% in January and rose to 1.9% in February. Eurostat's flash estimate put March inflation at 2.5%, with energy prices up 4.9% on a year earlier after a 3.1% fall in February. The ECB's March staff projections, which exceptionally used information up to 11 March, put headline inflation at 2.6% in 2026, 2.0% in 2027 and 2.1% in 2028, and growth at 0.9%, 1.3% and 1.4%. The ECB said financial conditions had tightened since its February meeting, with stock markets lower and market interest rates, especially short-term rates, notably higher. It warned that a prolonged war could push energy prices higher, for longer than expected, and weigh on confidence. Bulgaria joined the euro area on 1 January 2026.

Bank credit was growing, but slowly. Lending to firms grew by 3.0% in December 2025 and 2.8% in January 2026, while mortgage lending grew by 3.0% in both months. Bank lending rates for firms ticked up to 3.6% in December from 3.5% in November, as did the cost of issuing market-based debt. The average rate on new mortgages edged up to 3.4% in January, and bank lending rates for firms stayed at 3.6%. The ECB's monetary data for February showed adjusted loans to households growing by 3.0% and to non-financial corporations by 2.9%. Deposits grew faster than loans: household deposits rose 3.2% and corporate deposits 3.9% in the year to February. The bank lending survey reported that credit standards for business loans tightened again in the fourth quarter of 2025.

System indicators

The ECB's supervisory statistics for the fourth quarter of 2025, published on 18 March 2026, describe a sector that entered the shock with more capital and fewer problem loans than a year earlier. The aggregate CET1 ratio rose to 16.18%, from 16.10% in the third quarter and 15.97% a year earlier. Country ratios ranged from 13.29% in Spain to 22.05% in Latvia. The NPL ratio fell 4bp in the quarter to 2.18%, the lowest since the series was first published in 2020. The NPL ratio for loans backed by commercial real estate was 4.41%, down from 4.58% in the third quarter, and for SME loans 4.73%. Stage 2 loans, those with a significant increase in credit risk, fell to 9.33% of the total from 9.93% a year earlier. By sector, the NPL ratio was 2.11% for household loans and 3.45% for loans to non-financial corporations. That leaves the NPL ratio at the low point of the published series just as the energy shock begins to test borrowers.

Profitability softened at the end of the year. The annualised return on equity was 9.53% in the fourth quarter, down from 9.88% in the third quarter and broadly level with 9.54% a year earlier. Country returns ranged from 6.38% in Germany to 15.37% in Portugal, and the net interest margin was 1.52% against 1.50% in the third quarter. Liquidity rose: the liquidity coverage ratio reached 158.60%, and the loan-to-deposit ratio fell to 100.49%, the second-lowest since the series began in 2015.

ECB-supervised banks: key indicators

Source: European Central Bank (Banking Supervision), ECB publishes supervisory banking statistics on significant institutions for the fourth quarter of 2025, 18 March 2026.

The European Banking Authority's risk dashboard for the fourth quarter of 2025, which covers the wider EU/EEA sample, published on 23 March 2026, confirms the picture. The EU/EEA CET1 ratio was stable at 16.3% and return on equity was 10.4%, against 10.5% in December 2024. The net interest margin, which had fallen from 1.66% in December 2024 to 1.58% in September 2025, rose to 1.6%, which the EBA said suggested the downward trend may have reached its trough. The NPL ratio was stable at 1.8% and the liquidity coverage ratio rose to 163.1% from 160.7%. Deposits rose significantly, with household deposits up 1.8% and corporate deposits up 3.6% over the final quarter of 2025. The dashboard also quantified banks' direct exposures to the Middle East. They totalled €132bn at end-2025, including around €47bn of loans to banks and other financial corporations and around €33bn to non-financial corporations, less than 0.5% of EU/EEA bank assets. The EBA warned that the indirect channel matters more: second-round effects through energy prices, inflation, weaker growth and supply chains, especially for transport, construction and some manufacturing.

EU/EEA banks: EBA risk dashboard, Q4 2025

Source: European Banking Authority, The European banking sector enters period of geopolitical uncertainty from a position of strength (Q4 2025 Risk Dashboard), 23 March 2026.

### Capital requirements ECB capital demands for 2026 are broadly unchanged. The 2025 supervisory review, covering 105 banks, left overall CET1 requirements and guidance for 2026 broadly stable at 11.2% and the Pillar 2 requirement at 1.2%, while Pillar 2 guidance fell from 1.3% to 1.1%. The ECB's supervisory priorities for 2026-28 centre on resilience to geopolitical risks and macro-financial uncertainty, and on operational resilience and IT. Under the fully loaded CRR3 framework, the EBA estimates the average EU/EEA CET1 ratio would fall to around 15.3%, and the number of banks bound by the output floor would rise from 2 to 33, with a projected shortfall of €12.7bn once the floor is fully implemented.

United Kingdom: a cut deferred, buffers held

In February the Monetary Policy Committee was close to cutting. Four of nine members voted to reduce Bank Rate to 3.5%, and the Committee said Bank Rate had already been reduced by 150bp since August 2024 and was likely to be reduced further. It expected CPI inflation, which had fallen from 3.8% in September 2025 to 3.4% in December, to fall back to around the 2% target from April. CPI inflation was 3.0% in the 12 months to February 2026, with services inflation at 4.3% and core inflation at 3.2%.

By March the energy shock had reversed that outlook. The minutes recorded Brent crude at over $100 per barrel before the meeting, around 60% higher than at the time of the February Report, and European wholesale gas above €50 per MWh, around 60% above its pre-conflict level. Based on energy prices on 16 March, CPI inflation was expected to be close to 3.5% in March, and around 3% in the second quarter rather than the 2.1% previously projected. The MPC voted unanimously to hold at 3.75%. UK GDP grew by only 0.1% in the fourth quarter of 2025, and unemployment was 5.2% in the three months to January.

Credit was still flowing in February. Net mortgage borrowing rose to £4.8bn in February, annual growth in net mortgage lending was 3.4%, and businesses borrowed £4.3bn in bank loans. The effective rate on newly drawn mortgages was 4.10% in February. The FPC estimated that, since the conflict began, average two-year and five-year fixed mortgage rates had risen by about 80bp and 70bp, and the number of mortgage products had fallen from around 8,500 to 7,000.

The FPC's record of its 27 March meeting, published on 1 April, kept the countercyclical capital buffer at 2% and found no evidence that banks were restricting lending to protect capital. It noted that the market moves had not reached the levels in the 2025 Bank Capital Stress Test scenario, in which the aggregate CET1 ratio fell from 14.5% to a low point of 11.0% and no bank had to strengthen its capital. UK banks' exposure to private market funds and highly leveraged sponsor-backed companies was about 4% of committed limits. The FPC also cited the February default of Market Financial Solutions, a non-bank mortgage lender partly funded by private credit, as evidence of weaknesses in risky credit markets. Its December report had already judged that risks to financial stability increased during 2025. Bank shares had fallen but remained significantly higher than a year earlier, with an aggregate price-to-tangible-book ratio of 1.4 times.

In December 2025 the FPC lowered its benchmark for system-wide Tier 1 requirements to around 13% of risk-weighted assets, equivalent to a CET1 ratio of around 11%, from around 14%. The PRA published its final Basel 3.1 rules on 20 January 2026, to take effect on 1 January 2027.

UK banking system indicators

Source: Bank of England, Financial Stability Report - December 2025, 2 December 2025; Bank of England, Financial Policy Committee Record - April 2026, 1 April 2026; Bank of England, Money and Credit - February 2026, 30 March 2026.

Switzerland: rates at zero, a franc to defend

The Swiss National Bank left its policy rate at 0% on 19 March 2026. Swiss inflation was 0.1% in February, up from 0.0% in November 2025. The SNB's conditional forecast puts inflation at 0.5% in 2026, 0.5% in 2027 and 0.6% in 2028, and it expects growth of around 1% in 2026 and around 1.5% in 2027. Its main response to the war was to say that its willingness to intervene in the foreign exchange market had increased, to counter a rapid appreciation of the franc. UBS reported 2025 net profit of $7.8bn, up 53%, a CET1 capital ratio of 14.4% and a return on CET1 capital of 10.8%, or 13.7% on an underlying basis, and plans to repurchase $3bn of shares in 2026.

Nordic markets: Sweden waits, Norway turns

The Riksbank held its policy rate at 1.75% in March, applying from 25 March 2026. It began cutting from 4% in May 2024, reached 1.75% in September 2025 and has held the rate unchanged at its meetings since. It expects the rate to remain at 1.75% for some time if the outlook holds, and CPIF inflation to reach target in 2029. It expects the war to dampen growth somewhat in the near term and to push up CPIF inflation through higher energy prices. Its November 2025 Financial Stability Report found the major Swedish banks profitable with low loan losses, and noted that the countercyclical buffer at its neutral level of 2% gives Finansinspektionen room to release it in a shock. The report flagged consumer credit banks as weaker, with some operating relatively close to their capital requirements.

Norges Bank moved furthest. In January it expected to reduce its 4% policy rate further during 2026. By 25 March it judged a rise would likely be appropriate at one of its forthcoming meetings, and its rate forecast, revised up since December, pointed to between 4.25% and 4.5% by the end of 2026. It cited high volatility in energy and financial markets and higher interest rates in Norway and abroad.

Central Europe: Prague holds, Budapest eases once

The Czech National Bank kept its two-week repo rate at 3.50% on 5 February and at 3.5% on 19 March, when all seven Board members voted to hold. Inflation has been close to the 2% target since January 2024 and fell to 1.4% in February, the lowest in ten years, while GDP rose by 2.6% and wages by 7.4% year on year in the fourth quarter of 2025. The macroprudential signal is tightening. On 5 March the CNB left the countercyclical buffer at 1.25%, but estimated that additional capital of CZK 46.8bn, equivalent to a 1.5% rate, would be needed to cover cyclical risks, and said the likelihood of an increase had risen. At 31 December 2025, household lending for house purchase was growing by 8.3% and consumer lending by 10.8%. The Board said gradually accelerating credit growth was raising the quantity of money in the economy, which is why it still regards relatively tight policy as necessary. For Czech banks, that combination means strong loan growth alongside a rising probability of higher capital buffers.

Hungary's Monetary Council cut the base rate by 25bp to 6.25% on 24 February and held it on 24 March. Its March forecast raised expected inflation to 3.8% for 2026 and 3.7% for 2027, from 3.2% and 3.3% in December, and it now expects the 3% target to be reached sustainably in the second half of 2027. On 10 March the Council decided to meet major foreign exchange liquidity needs arising from energy imports.

In Poland, the quarter's main banking event was a change of ownership. Erste Group completed its purchase of a 49% controlling stake in Santander Bank Polska, the country's third-largest bank by assets, on 9 January 2026, for about €7.0bn. Erste described it as the largest cross-border transaction in European banking in the past 20 years.

Large banks: strong 2025 results, cross-border consolidation

Results for 2025, published between 29 January and 25 February 2026, showed six of Europe's largest banks with double-digit returns and CET1 ratios between 12.6% and 14.9%. Deutsche Bank's pre-tax profit rose 84% to €9.7bn and its net profit doubled to €7.1bn. Santander reported attributable profit of €14,101m, up 12%, and BNP Paribas net income of €12,225m, up 4.6%. HSBC's reported pre-tax profit fell by $2.4bn to $29.9bn, mainly because of a $4.9bn net adverse impact from notable items, but its return on tangible equity excluding them was 17.2%. HSBC expects expected credit loss charges of around 40bp of average gross loans in 2026. Capital returns grew: Barclays distributed £3.7bn in respect of 2025, up from £3.0bn in 2024, and Deutsche Bank proposed €2.9bn of distributions. UBS plans to repurchase $3bn of shares in 2026. These results were struck before the energy shock, so 2026 provisioning will show how much of the earnings strength survives a slower economy.

Large European banks, 2025 results

Source: HSBC Holdings plc, HSBC Holdings plc 2025 results (RNS 3236U), 25 February 2026; Banco Santander, Santander 2025 results press release, 3 February 2026; BNP Paribas, Fourth quarter and full-year 2025 results, press release, 5 February 2026; Deutsche Bank, Deutsche Bank hits 2025 financial targets with record full-year and fourth-quarter profits, 29 January 2026; Barclays PLC, Barclays PLC 2025 Results Announcement (RNS 3207S), 10 February 2026; UBS Group AG, UBS's fourth-quarter and full-year 2025 results, 4 February 2026.

Consolidation advanced in March. On 16 March UniCredit announced a voluntary exchange offer for Commerzbank, in which it holds a direct stake of around 26% and about 4% more through total return swaps. The offer is designed to overcome the 30% cliff-edge in German takeover law, and UniCredit expects to exceed 30% without reaching control, at an expected 0.485 UniCredit shares per Commerzbank share, or €30.8, a 4% premium to the 13 March close. UniCredit expects a formal launch at the beginning of May and settlement by the first half of 2027.

Regulation: simpler rules, unchanged resilience

The regulatory direction in Europe is towards simplification rather than higher requirements. On 11 December 2025 the ECB Governing Council proposed merging banks' capital buffers into a non-releasable and a releasable buffer, and cutting the leverage ratio framework from four elements to two, a 3% minimum and a single buffer. The Bank of England's lower Tier 1 benchmark and the FPC's review of capital requirements point the same way, with an update due in the July 2026 Financial Stability Report. The UK's Basel 3.1 rules take effect on 1 January 2027. In the EU, the EBA projects no capital shortfall before 2030 under its static balance-sheet assumption.

Cross-country comparison

Europe at a glance: policy rates, inflation and bank buffers

Source: European Central Bank, Combined monetary policy decisions and statement, 19 March 2026, 19 March 2026; Eurostat, Euro area annual inflation up to 2.5% (flash estimate, March 2026), 31 March 2026; European Central Bank (Banking Supervision), ECB publishes supervisory banking statistics on significant institutions for the fourth quarter of 2025, 18 March 2026; Bank of England, Bank Rate maintained at 3.75% - March 2026 Monetary Policy Summary and Minutes, 19 March 2026; Office for National Statistics, Consumer price inflation, UK: February 2026, 25 March 2026; Bank of England, Financial Stability Report - December 2025, 2 December 2025; Bank of England, Financial Policy Committee Record - April 2026, 1 April 2026; Swiss National Bank, Monetary policy assessment of 19 March 2026, 19 March 2026; UBS Group AG, UBS's fourth-quarter and full-year 2025 results, 4 February 2026; Sveriges Riksbank, Policy rate decision (notified on 19 March 2026), 19 March 2026; Sveriges Riksbank, Financial Stability Report 2025:2, 13 November 2025; Norges Bank, Policy rate kept unchanged at 4% (March 2026), 26 March 2026; Czech National Bank, Statement of the Bank Board for the press conference following the monetary policy meeting, 19 March 2026, 19 March 2026; Czech National Bank, Official information of the Czech National Bank of 5 March 2026 regarding the setting of the countercyclical capital buffer rate, 5 March 2026; Magyar Nemzeti Bank, Press conference following the Monetary Council's decision on 24 February 2026, 24 February 2026; Magyar Nemzeti Bank, Press conference following the Monetary Council's decision on 24 March 2026, 24 March 2026.

Hungary was the only economy in the table to cut in the quarter, and Norway the only one to signal a rise. Inflation readings diverged widely, from 0.1% in Switzerland and 1.4% in the Czech Republic to 3.0% in the UK.

Outlook risks

The first risk is the duration of the energy shock. The ECB, the Bank of England and Norges Bank all cited the energy shock's effect on the inflation outlook in setting their stance. A second risk is the bond market: the FPC noted 2-year gilt yields up 100bp from pre-conflict levels and hedge funds cutting net gilt repo borrowing by 21%, or £19bn. A third is credit quality in energy-intensive sectors, which the EBA singled out, and in commercial real estate, where the euro area NPL ratio was 4.41% at end-2025. Capital is not the constraint: the ECB's aggregate CET1 ratio of 16.18% compares with overall requirements and guidance of 11.2%. The gap of almost five percentage points is the cushion banks carry into a period of slower growth and higher funding costs.

Earnings face cross-currents. For euro area banks, the ECB held its deposit rate at 2.00% while short-term market rates rose notably, and the EBA saw the EU/EEA net interest margin rise to 1.6% in the fourth quarter, suggesting its decline may have reached a trough. Loan volumes are the weaker side: lending to firms slowed to 2.8% in January, and adjusted loans to non-financial corporations grew by 2.9% in February. In the UK, the FPC estimated that two-year fixed mortgage rates had risen by about 80bp since the conflict began, an early sign of tighter household credit conditions.

Primary sources: European Central Bank, Combined monetary policy decisions and statement, 19 March 2026, 19 March 2026; Bank of England, Financial Policy Committee Record - April 2026, 1 April 2026; Bank of England, Bank Rate maintained at 3.75% - March 2026 Monetary Policy Summary and Minutes, 19 March 2026; Swiss National Bank, Monetary policy assessment of 19 March 2026, 19 March 2026; Sveriges Riksbank, Policy rate decision (notified on 19 March 2026), 19 March 2026; European Central Bank (Banking Supervision), ECB publishes supervisory banking statistics on significant institutions for the fourth quarter of 2025, 18 March 2026; Czech National Bank, Statement of the Bank Board for the press conference following the monetary policy meeting, 19 March 2026, 19 March 2026; Norges Bank, Policy rate kept unchanged at 4% (March 2026), 26 March 2026; Bank of England, Bank Rate maintained at 3.75% - February 2026 Monetary Policy Summary and Minutes, 5 February 2026; Magyar Nemzeti Bank, Press conference following the Monetary Council's decision on 24 February 2026, 24 February 2026; European Banking Authority, The European banking sector enters period of geopolitical uncertainty from a position of strength (Q4 2025 Risk Dashboard), 23 March 2026; Eurostat, Euro area annual inflation up to 2.5% (flash estimate, March 2026), 31 March 2026; European Central Bank, Combined monetary policy decisions and statement, 5 February 2026, 5 February 2026; Norges Bank, Policy rate kept unchanged at 4 percent (January 2026), 22 January 2026; Czech National Bank, CNB Board decisions, 5 February 2026, 5 February 2026; Magyar Nemzeti Bank, Press conference following the Monetary Council's decision on 24 March 2026, 24 March 2026; European Central Bank, Monetary developments in the euro area: February 2026, 26 March 2026; European Central Bank (Banking Supervision), ECB keeps capital requirements broadly stable for 2026 amid persisting global challenge, 18 November 2025; Office for National Statistics, Consumer price inflation, UK: February 2026, 25 March 2026; Bank of England, Money and Credit - February 2026, 30 March 2026; Bank of England, Financial Stability Report - December 2025, 2 December 2025; Prudential Regulation Authority (Bank of England), PS1/26 - Implementation of Basel 3.1: Final rules, 20 January 2026; UBS Group AG, UBS's fourth-quarter and full-year 2025 results, 4 February 2026; Sveriges Riksbank, Financial Stability Report 2025:2, 13 November 2025; Czech National Bank, Official information of the Czech National Bank of 5 March 2026 regarding the setting of the countercyclical capital buffer rate, 5 March 2026; Erste Group, Erste Group successfully completes acquisition of 49% controlling stake in Santander Bank Polska, 9 January 2026; HSBC Holdings plc, HSBC Holdings plc 2025 results (RNS 3236U), 25 February 2026; Barclays PLC, Barclays PLC 2025 Results Announcement (RNS 3207S), 10 February 2026; BNP Paribas, Fourth quarter and full-year 2025 results, press release, 5 February 2026; Banco Santander, Santander 2025 results press release, 3 February 2026; Deutsche Bank, Deutsche Bank hits 2025 financial targets with record full-year and fourth-quarter profits, 29 January 2026; UniCredit, UniCredit press release on the voluntary exchange offer for Commerzbank, 16 March 2026; European Central Bank, Governing Council proposes simplification of EU banking rules, 11 December 2025.