The European banking sector enters period of geopolitical uncertainty from a position of strength

The European Banking Authority (EBA) published its Q4 2025 Risk Dashboard (RDB), confirming 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.  For the first time, the RDB is published alongside the new Capital Requirements Regulation/Capital Requirements Directive (CRR3/CRD6) dashboard, which replaces the former Basel 3 monitoring Report.

The RDB provides disclosures on EU/EEA banks’ direct exposures to counterparties located in the Middle East, which totalled to EUR 132bn at end-2025. These exposures include around EUR 47bn in loans and advances to banks and other financial corporations and around EUR 33bn to non-financial corporations (NFCs). While exposures remain limited (less than 0.5% of total EU/EEA banks’ assets), the escalation of tensions could generate second-round effects, notably via higher energy prices, inflationary pressures, weaker global economic growth and disruptions to supply chains. These effects would be particularly in energy-intensive sectors such as transport, construction and certain manufacturing segments.

Capital buffers and profitability remain banks’ first lines of defence. Risk-weighted assets increased by just over 1% in 2025, reaching EUR 10.2 trillion in Q4, while the common equity tier 1 (CET1) ratio (transitional under the CRR3) remained stable at 16.3%. Return on equity held steady in double digits at 10.4% (10.5% in December 2024). The net interest margin (NIM), after declining from 1.66% in December 2024 to 1.58% in September 2025,  rose to 1.6%, suggesting that the downward trend observed in previous quarters may have reached its trough. The cost-to-income ratio rose to its highest level since March 2023, reflecting rising costs and seasonal effects.

Total assets remained stable at EUR 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. Non-performing loan (NPL) volumes declined slightly to 370 billion, keeping the NPL ratio stable at 1.8%. Stage 2 loans continued to fall, reaching 9.1% (from 9.3% in Q3 2025), pointing to an improvement in asset quality ahead of any potential deterioration linked to geopolitical tensions and global supply chain disruptions.

Liquidity conditions strengthened further. The liquidity coverage ratio (LCR) rose to 163.1% (from 160.7% in Q3 2025), with banks that exceed a ratio of 140% accounting for more than 80% of the total. The net stable funding ratio (NSFR) increased to 126.9%, while the loans-to-deposit ratio continued its downward trend, reaching 104.8%. Banks continued to focus on deposits in their funding mix.

While total liabilities remained steady, banks recorded a significant rise in both household customer deposits and NFC deposits, with increases of 1.8% and 3.6% respectively over the final quarter of the year. This growth offsets declines in deposits from other credit institutions and in other liabilities, including deposits from central banks.

The newly released EBA’s CRR3/CRD6 dashboard, available on the European Data Access Portal (EDAP), provides forward-looking projections of key capital metrics across the full output floor implementation period (2025 to 2030) and under the fully-loaded framework. Under fully-loaded CRR3 implementation, the average CET1 ratio would slightly decrease but remain robust at around 15.3%. Such reduction reflects 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 increase from 2 at December 2025 to 33 under the fully loaded 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 EUR 12.7bn once the output floor is fully implemented, thus giving banks ample time to adjust.