Analysis of the Spring 2025 EBA's RAR: Implications for European Financial Sector

Last June, the European Banking Authority (EBA) published its annual risk assessment report, the Risk Assessment Report (RAR 2025). It offers a detailed diagnosis of the current state of the financial sector in Europe, as well as the main challenges and vulnerabilities it may face in the short and medium term.

The report, based on information provided by a broad sample of banking institutions representative of the European landscape in terms of geographic origin, business model, and size, serves as a valuable reference for comparative and forward-looking analysis. I consider it a highly recommended reading, not only for financial professionals but also for anyone interested in understanding the structural and cyclical dynamics affecting the sector.

Although this article concludes with an executive summary highlighting the most relevant aspects of the report, I would like to briefly share some personal reflections and conclusions that I believe may be of interest and usefulness to risk management, strategic planning, and financial control teams.

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1. Macroeconomic Environment and General State of the Sector

The European Union financial system generally shows a position of strength, having overcome the adverse effects of the global health crisis. European economies have gradually regained their levels of growth and employment, which has had a positive impact on solvency and banking profitability indicators.

On the liabilities side, institutions have gradually repaid the extraordinary liquidity facilities granted during the pandemic period, resulting in a reshaping of their funding sources. Customer deposits remain the main pillar – and are expected to continue to be so in the coming years, although the conditions of these deposits have evolved in line with the interest rate environment and increased demands, particularly from institutional and sophisticated clients. These conditions have become more "complex" in terms of both pricing and maturity.

Likewise, the debt issuance market has gained importance, both due to the need to strengthen structural funding and to comply with regulatory requirements related to capital buffers, which necessitates careful management of funding costs in a context of volatile interest rates and fluctuating spreads.

On the assets side, there is a revival of mortgage lending and consumer credit, as well as a recovery in corporate lending, especially among large corporations, driven by improved macroeconomic prospects. This growth is expected to continue in the upcoming years, although at a slower pace (aside from potential uncertainties that may arise).

In terms of margins, the decline in interest rates has created challenges for net interest income. However, institutions are responding to this pressure by recovering fee-based income, diversifying their revenue sources, and improving operational efficiency. In this context, digital transformation continues to replace the traditional branch-based customer service model with new forms of client interaction.

Regarding solvency, indicators remain at comfortable levels. Even so, the growing pressure to return value to shareholders, whether through dividends or share buybacks, combined with asset growth and some liquidity constraints, is increasing interest in mechanisms such as significant risk transfer (SRT).

The EBA also highlights the potential of mergers and acquisitions (M&A), especially cross-border mergers, as a way to enhance the efficiency of the European banking system. While this strategy presents political challenges, it is particularly relevant in markets like Spain.

Ultimately, the impression I draw from the RAR is that, while the evolution over the last four years has been very positive, future financial institution budgets reflect a certain prudence regarding growth, with a focus on managing excess capital and liquidity, and aiming more for optimization than expansion.

2. Risks and Sources of Uncertainty

Although the financial sector has improved in recent years, there are still major areas of uncertainty that need close and continuous monitoring.

One key concern is the unstable geopolitical environment. Armed conflicts in Europe and nearby regions are creating uncertainty in the markets and could directly affect the quality of banks' assets. This impact could come from large corporate exposures as well as from pressure on household finances. While increased defense spending may benefit certain industries, it also adds volatility and complicates financial planning.

Another significant concern is the lack of strong political and economic leadership at the global level. This leadership gap makes it harder to address key structural issues, including fiscal sustainability, international trade tensions, and much-needed reforms to secure the long-term viability of pension systems. This environment of uncertain governance adds an extra layer of complexity to strategic decision-making in the financial sector.

Lastly, cybersecurity is becoming a significant systemic risk. Financial institutions and their technology providers must continue to strengthen their defenses against cyber threats to protect data integrity and maintain operational continuity in an increasingly digital and interconnected landscape.

Conclusions and Recommendations

Drawing on my years of experience in risk management and a personally cautious approach, I would like to offer the following reflections, which I believe are essential for navigating the future:

1. We are facing an environment characterized more by structural uncertainty than by mere cyclical volatility.
2. The prolonged scenario of low interest rates continues to exert pressure on net interest margins.
3. Competition in the capital markets, especially regarding the funding of large public and private issuers, demands proactive balance sheet and liquidity management.
4. Operational efficiency emerges as a strategic priority, making it essential to advance in automation, digitalization, and the integration of artificial intelligence and machine learning solutions. We should not lose sight of the role played by non-traditional financial competitors.
5. Today's client is more knowledgeable, better informed, and above all, more demanding and complex, which requires a more sophisticated and personalized offering in terms of pricing, product diversity (or more precisely, feature diversity), and service quality.

In this context, the ability to generate relevant, accurate, and real-time information will be a critical success factor. It is not enough to produce conventional stress scenarios; it is necessary to develop advanced capabilities for balance sheet, capital, liquidity, and key metric simulation and forecasting, considering the dynamic behavior of customers and other economic agents under adverse conditions and anticipating potential management measures.

This requires not only access to the right internal and external tools, and skilled teams to design and implement these controls, but also governance structures and leadership capable of interpreting the results effectively and communicating them clearly across the organization and to external stakeholders.

Executive Summary – Risk Assessment Report 2025 (EBA)

The European Banking Authority (EBA) has published its 2025 annual Risk Assessment Report, analyzing developments in the banking systems of the EU and EEA. The report identifies key strengths, structural vulnerabilities, and emerging threats. Below are the main highlights:

Macroeconomic Environment and Market Outlook

• The EU economy grew by 1% in 2024, while inflation fell to 2.6%, down from 5.4% in 2023.
• The unemployment rate stood at 5.8% in March 2025, compared to 6.5% a year earlier.
• Increased defense spending, driven by geopolitical tensions, may generate sector-specific expansion effects.
• Aggregate public debt reached 82% of GDP, with significant differences between Member States.

European Banking Sector Trends

1. Market Resilience and Financial Performance
   • The price-to-book ratio (PtB) exceeded 1 for the first time in years, reflecting improved sector valuation.
   • Despite volatility from factors such as US tariffs (April 2025), bank stocks remained resilient.
   • Sovereign yields increased but remained below 2023 highs.
2. Growth in Banking Assets
   • Total assets reached EUR 28.2 trillion, a 3.2% annual increase.
   • There was a significant rise in loans and advances (+EUR 580 billion) and in holdings of debt securities and equities.
   • A 13.7% decline in cash balances was offset by increased lending activity.
3. Credit Momentum Driven by Lower Rates
   • Loans to households and non-financial corporations grew by 1.8%, reaching EUR 13.5 trillion.
   • Notable growth in consumer credit (+6.6% year-on-year).
   • Lending standards for mortgages have eased.
4. Exposure to Sovereigns and Non-Bank Financial Institutions (NBFIs)
   • Sovereign exposures increased by 9%, totaling EUR 3.6 trillion.
   • Links to non-bank financial institutions now account for 10.1% of consolidated assets, raising potential contagion risks.

 Solvency, Liquidity, and Funding

1. Capital and Risk-Weighted Assets (RWA)
   • The total capital ratio stood at 20.2% at year-end 2024.
   • CET1 capital increased by 5%, reaching EUR 1.6 trillion.
   • The growth in RWAs (+EUR 460 billion) was mainly due to credit risk.
2. Liquidity (LCR / NSFR)
   • The average Liquidity Coverage Ratio (LCR) in euros was 156%, though showing a downward trend.
   • The average Net Stable Funding Ratio (NSFR) was 127.1%. In USD, vulnerabilities were noted: average NSFR at 98%, with 37% of banks below 100%.
3. Liquidity and Funding Projections
   • A 7 percentage point decline in the LCR is expected, due to rising net outflows.
   • A 7% increase in long-term funding is projected by 2027, reaching EUR 4.8 trillion.
   • Covered bond issuance is projected to grow by EUR 325 billion in 2025.

Profitability and Income Composition

• Return on Equity (ROE) rose slightly to 10.5%.
• Net interest income declined by 3%, while fee income increased, supporting revenue diversification.

Operational, Technological, and Structural Risks

• Fraud and operational risk events increased (3.1 million in 2024), though material losses declined.
• Digital asset integration is growing, with banks developing custody and trading services, alongside evolving regulatory frameworks (e.g., MiCA).
• Cybersecurity and operational resilience remain critical in light of geopolitical tensions and ongoing technological transformation.

Risk Management and Strategic Challenges

• The ECB’s excess reserves have fallen 40% since 2022, calling for more active liquidity management.
• Banks are increasing their sovereign bond holdings and participation in term repos.
• Key areas for proactive risk management include:
  • Stress testing for geopolitical and regulatory shocks
  • Measuring and controlling interconnections with non-bank sectors
  • Effective integration of ESG risks, beyond just climate-related factors

Final Considerations

• The environment remains shaped by structural uncertainty, including geopolitical tensions, monetary normalization, and digital transformation.
• Strengthening credit origination practices, particularly in unstable conditions, is a top priority.
• Mergers and acquisitions (M&A) are seen as a way to boost efficiency and improve structural profitability.
• Digitalization and advanced analytics tools are essential to maintaining a competitive advantage.

You can access the Spring 2025 EBA's RAR presentation document here.

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