By Alexander Jones, International Banker
The consensus among analysts is that broad stability will characterise the global banking sector in 2026. That said, the key industry risks that periodically cropped up during 2025 have the potential to return during the coming year. While credit-rating firms are largely “neutral” on the sector for the time being, with most core financial metrics unlikely to be spectacularly impacted, they remain watchful for specific trends that could trigger a more pronounced downside scenario.
According to S&P Global Ratings, four key risks will influence bank ratings in 2026:
- An escalation of geopolitical risks, such as the Russia-Ukraine war and conflicts in the Middle East;
- A stronger spillover from tariff shocks to the real economy and financial markets than initially anticipated;
- A weakening of banks’ regulatory environments; and
- Evolving risks, including climate change and new technologies such as generative artificial intelligence (GenAI).
As the global economy demonstrated throughout 2025, heightened geopolitical risks remain inescapable. Some regions are now gearing up to ensure their banking sectors can withstand potential adverse shocks from escalating conflicts, with Europe likely to do the most in 2026 to counter any destabilising effects.
A report published in October by the European Parliament—“The Impact of Geopolitical Risks on the Resilience of Banks in the Banking Union”—spelled out only too clearly how seriously elevated geopolitical risks could rock the banking sector’s stability. According to the report, empirical research indicated that associated spikes in geopolitical-risk indices coincided with potentially sizeable drops in bank profitability (especially for smaller and weakly capitalised banks) and asset quality (particularly for smaller banks), as well as with increases in banks’ perceived risks, as measured by the credit-derivatives market.
From a supervisory perspective, the report also found that geopolitical risks were reinforced by certain weaknesses in the management of cybersecurity risks, a finding that was generated by an ad hoc stress test of the cyber-resilience of major banks. “Although recovery plans were present in all surveyed banks, many institutions did not have in place specific tools for managing complex scenarios and preserving customer data and assets,” the research added.
The European Central Bank (ECB) has urged Europe’s banking sector to accept a new reality with more frequent shocks, including tariffs and cyberattacks, and to remain prepared for a range of possibilities, even when the exact nature of the next crisis is unknown. “Geopolitical tensions and shifting trade policies, climate and nature-related crises, demographic change and technological disruptions are exacerbating structural vulnerabilities, making the likelihood of extreme, low-probability events unprecedentedly high,” Europe’s top monetary institution explained in a November statement. It also confirmed that strengthening banks’ resilience to political risks and uncertainties will remain the ECB’s top supervisory priority, with a focus on prudent risk-taking and adequate capitalisation.
On the tariff front, meanwhile, banks worldwide will likely remain wary of extending credit to certain industries and businesses, particularly those reliant on global supply chains. With margins being squeezed and the risks of corporate-loan defaults and higher capital requirements elevated, banks in 2026 will want to ensure they lend only to companies with sufficiently contained credit-risk profiles.
Some analysts have pointed to Europe as the region with the highest banking-sector vulnerability to trade wars. Citing various studies on the subject, BBVA (Banco Bilbao Vizcaya Argentaria) found in August that European banking systems are both the “most” and “least” exposed to the trade war. “Italy is considered the most exposed via the Bank of Italy due to its exports to the United States and the composition of its credit portfolio, more concentrated in sectors affected by tariffs,” according to the Spanish bank. “Germany, Ireland and Slovenia have also been identified as vulnerable. Moody’s agrees in identifying Ireland, Germany and Italy as the most exposed, also suggesting that the banking systems of Spain, Italy and the United Kingdom could see their net interest margins (NIM) reduced due to the high proportion of variable-rate mortgages.”
Regarding the regulatory environment in 2026, analysts have stated that they expect a possible easing of certain rules for banks. Fitch Ratings, for example, projected an overall “looser” outlook for bank regulation as deregulation rises, with the United States and the United Kingdom leading the way—and to a lesser extent, the European Union (EU). Emerging markets, meanwhile, will see “tighter standards” to reduce banking-sector vulnerabilities and attract foreign investment.
“Key areas to watch for 2026 are the implementation of Basel III endgame rules in the US, amendments to resolution regimes, including depositor preference and capital stack, and digital asset innovation and the increasing scrutiny of private credit markets,” Fitch noted in its “Global Banking Regulation Outlook 2026” report. “We expect macroprudential policies to vary across regions, with a looser stance in low-growth developed markets and a tighter approach in high-growth, high-inflation emerging markets.”
While the major credit-rating firms have been clear about the key risks to global banking that may emerge in 2026, their overall outlooks have nonetheless suggested a largely moderate, stable environment for global lenders. For example, despite persistent challenges such as geopolitical tensions and high trade barriers, Moody’s 2026 outlook highlighted broad stability across the sector, with strong bank creditworthiness supported by resilient asset quality, solid funding profiles and sustained profitability.
This is largely owing to a resilient, albeit slowing, US economy, while several of the largest European countries may even see their real GDP (gross domestic product) gradually increase from modest levels. In emerging markets, Moody’s has highlighted rapid GDP growth across several key regions, particularly India, the fastest-growing economy in the G20 (Group of Twenty).
“Broadly stable employment levels and lower interest rates will support credit quality, although central bank monetary policies are diverging,” according to the rating firm’s global co-head of banking, Donald Robertson. “Net interest margins will likely be squeezed by lower rates in some regions, but banks will mitigate this by growing other sources of income. And healthy capital and reserve levels will continue to support both credit growth and shareholder distributions. However, the prospect of a looser regulatory environment adds some incremental risk for bank creditors.”
Similarly, S&P Global Ratings has forecast broad rating stability for global banks in 2026, with 85 percent of its ratings currently assigned a “stable” outlook. “Banks’ balance sheets are solid, characterized by good capitalization, sound asset quality, and adequate funding and liquidity,” an S&P report published on December 9 acknowledged. “That said, banks are operating at a volatile time, when significant policy decisions and regional conflicts could disrupt financial markets and rapidly change the economic environment.”
Moody’s also observed that banks will continue to invest in their businesses in response to the rapid development of private credit markets, artificial intelligence and digital assets, all of which will reshape the sector for many years to come. “Beyond macro and regulatory drivers, structural change is accelerating. AI is being deployed across risk management, compliance, customer service and product design, improving efficiency but also introducing new operational and cyber risks,” Moody’s “Outlooks 2026: Global Banks” explained.
“Private credit is expanding its role as an alternative source of finance for corporates, increasing competitive pressure on banks in some segments,” the outlook also noted. “At the same time, digital assets and tokenized financial instruments are prompting banks to adapt their technology stacks and risk frameworks.”
Could private credit pose a major risk to the banking sector this year? Not according to S&P Global Ratings’ managing director of financial institutions ratings, Brendan Browne. “Such lending requires strong surveillance, a thorough understanding of collateral, and safeguards to ensure that such collateral is not being double-counted, that is, pledged elsewhere,” Browne recently explained. “That said, we don’t see this as a material systemic risk that could cause major widespread problems for banks. However, NBFI [non-bank financial institution] lending is likely to continue growing at a robust pace. Furthermore, for some banks, NBFI lending as a proportion of total lending has grown well into the low double digits and sometimes into the mid-teens or higher.”
Fitch Ratings, however, has specifically cited the rising exposure to non-bank financial institutions (NBFIs), which now account for nearly 10 percent of bank loans, as a key risk to the banking sector, with US lenders particularly exposed. “While private credit offers opportunities, its complexity and opacity raise concerns about performance under stress,” according to Fitch’s November 21 outlook for US banks. “Consumer credit risk is increasing, particularly among lower-income borrowers facing high interest rates, eroding savings, and rising unemployment (forecast at 4.7 percent).”