EBA Says European Banks Are Strong Despite Rising Geopolitical Risk

The European banking sector has entered a more volatile geopolitical phase from a position of clear resilience, according to the European Banking Authority’s latest Q4 2025 Risk Dashboard. The data shows that EU and EEA banks remain strongly capitalised, highly liquid and broadly profitable, even as renewed conflict in the Middle East adds fresh uncertainty to the global outlook.

The EBA’s assessment matters because it arrives at a moment when markets are increasingly focused on second-round risks rather than immediate balance sheet stress. Direct bank exposures to counterparties in the Middle East stood at EUR 132 billion at the end of 2025, including around EUR 47 billion in loans and advances to banks and other financial corporations and about EUR 33 billion to non-financial corporates. On their own, those exposures remain limited, accounting for less than 0.5% of total EU and EEA banking assets. The bigger concern is indirect transmission through higher energy prices, rising inflation, weaker growth and supply chain disruption, particularly for energy-intensive sectors such as transport, construction and parts of manufacturing.

Even so, the headline prudential metrics remain solid. Risk-weighted assets rose only modestly in 2025 to EUR 10.2 trillion in Q4, while the transitional common equity tier 1 ratio under CRR3 held steady at 16.3%. That leaves the sector with a substantial capital buffer as it absorbs a more complex macro and geopolitical backdrop. Profitability also remained robust, with return on equity at 10.4%, only marginally below the 10.5% recorded in December 2024. For a sector facing both regulatory change and external shocks, that stability is notable.

There are also signs that margin pressure may be easing. After falling from 1.66% in December 2024 to 1.58% in September 2025, the net interest margin edged back up to 1.6% in Q4. That suggests the compression seen in earlier quarters may be bottoming out. At the same time, the cost-to-income ratio rose to its highest level since March 2023, indicating that cost pressure is building and could become a more important drag on earnings if growth slows further.

Asset quality remains another area of relative strength. Total assets were unchanged at EUR 29.1 trillion, while outstanding loans rose by more than 1%, driven mainly by residential real estate lending and finance to small and medium-sized enterprises. Non-performing loans fell slightly to EUR 370 billion, leaving the NPL ratio stable at 1.8%. Stage 2 loans also declined to 9.1% from 9.3% in the previous quarter, indicating that credit quality had continued to improve before any broader deterioration from geopolitical disruption feeds through.

Liquidity metrics were particularly strong. The liquidity coverage ratio rose to 163.1%, up from 160.7% in Q3 2025, while the net stable funding ratio increased to 126.9%. The loans-to-deposit ratio continued to decline, reaching 104.8%, as banks kept shifting their funding mix towards deposits. Household deposits rose by 1.8% over the quarter and non-financial corporate deposits increased by 3.6%, offsetting declines in deposits from other credit institutions and central banks. In practical terms, that gives the sector a firmer funding base at a time when market volatility could intensify.

A second important element of this release is the launch of the EBA’s new CRR3 and CRD6 dashboard, which replaces the former Basel 3 monitoring report. The new dashboard provides a forward-looking view of how banks’ capital positions are expected to evolve through the output floor implementation period from 2025 to 2030. Under the fully loaded CRR3 framework, the average CET1 ratio is projected to ease to around 15.3%, still a robust level by historical standards. The decline reflects a 4.7% average increase in Tier 1 minimum required capital once the output floor is fully phased in.

The output floor will bind a growing number of firms over time. The EBA expects the number of institutions constrained by it to increase from two at December 2025 to 33 under full implementation. Still, the projected capital impact appears manageable. On a static balance sheet assumption, no capital shortfalls are expected before 2030. At that point, the total shortfall is estimated at EUR 424.8 million, rising to EUR 12.7 billion once the output floor is fully implemented. That suggests banks have meaningful time to adapt through capital planning, retained earnings and balance sheet management.

Taken together, the message from the EBA is measured but reassuring. European banks are not insulated from geopolitical shocks, especially those that could feed through inflation, energy markets and supply chains. But they are entering this phase with solid capital, stronger liquidity and sound asset quality. For policymakers, supervisors and investors, the key takeaway is that the sector appears well placed to absorb near-term uncertainty while adjusting to the tighter prudential framework under CRR3 and CRD6.

Read the press release here.