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