EU/EEA banks resilient despite rising geopolitical, cyber risks

The EBA's latest assessment confirms EU/EEA banks' robust financial health, underpinned by solid capital and liquidity buffers, strong asset quality, and sustained profitability.

Funding conditions also remain broadly favorable, providing a stable operational base.

Despite this strong starting point, the risk environment is challenging and rapidly evolving, demanding continuous vigilance.

Heightened geopolitical tensions, particularly the conflict in the Middle East, introduce significant uncertainty.

While direct exposures of EU/EEA banks to affected regions are limited, the report warns of potential indirect and second-round effects.

These could manifest through higher energy prices, renewed inflationary pressures, weaker economic activity, and increased market volatility, impacting borrowers, funding conditions, and broader financial markets.

Operational and cyber risks are escalating concerns for the banking sector, driven by rapid digitalization and advanced technologies, including artificial intelligence.

The evolving cyber threat landscape and increasingly capable AI models could amplify these risks through new attack vectors and potential misuse.

The EBA stresses the importance of strong operational resilience, robust cybersecurity controls, and comprehensive contingency planning.

The report also highlights the continued expansion of private credit markets and growing interconnectedness between banks and non-bank financial institutions (NBFIs).

Exposures of EU/EEA banks towards NBFIs increased notably, and while private credit exposures are limited, they are concentrated in larger institutions.

This expansion warrants close monitoring due to potential risk transmission channels and competitive pressures in lending markets.