Europe’s banks are heading into 2026 with solid balance sheets, but with less room for error. After an unusually long credit cycle, risks are building just as the economic environment becomes more uncertain, according to Scope Ratings’ European Bank Outlook 2026.
Marco Troiano, head of financial institutions ratings at Scope, said banks are now in “the late and final part of an unusually long cycle”. While resilience remains strong, he warned that the sector has “very little room to absorb shocks if they come”, as political and market risks continue to accumulate.
Asset prices across real estate, equities and alternative assets remain high. A correction would weaken collateral values, slow lending and hit confidence. Political uncertainty adds another layer of risk. France’s 2027 elections are one example, with potential implications for fiscal policy and sovereign spreads. Europe’s dependence on United States dollar funding is another vulnerability, especially if global liquidity tightens.
Entering the next phase of the cycle
Despite these risks, banks enter the next phase of the cycle from a position of strength. Scope’s public ratings place major European banks firmly in investment-grade territory. This includes BNP Paribas, Crédit Agricole, ING and Santander.
Troiano, in a conference call on Thursday, also pointed to progress at Deutsche Bank, which was recently upgraded to A/Stable. The upgrade reflects changes to its business model and a reduced reliance on volatile investment-banking revenues.
Other rating agencies broadly share Scope’s reflections on the European banking sector. Moody’s, S&P Global Ratings and Fitch all highlight strong capital levels, solid profitability and still-benign asset quality. At the same time, they expect earnings momentum to slow as interest rates normalise.
Looking ahead to 2026, rating agencies expect the focus to shift from income growth to downside risks, including weaker corporate credit quality, refinancing pressure and political uncertainty. Rating agencies believe the issue for banks is less about solvency and more about execution in a more volatile environment, where funding access and capital flexibility matter more.
Scope does expect some deterioration as growth slows and corporate balance sheets come under pressure. “We do foresee a moderate pick-up in default rates, but this will not materially impact credit quality,” Troiano said in a conference call on Thursday. Capital buffers, he added, should cushion the downside.
Synthetic risk transfers
At the same time, Scope highlights a structural change in how banks manage their balance sheets. The use of synthetic risk transfer transactions has increased, particularly among large institutions such as Santander, UniCredit, BBVA, BNP Paribas and ING.
SRT’s allow banks to keep loans on their balance sheets while transferring credit risk to external investors, typically through derivatives or structured notes. Once the economic risk is transferred, regulators allow a reduction in risk-weighted assets. This frees up capital and supports regulatory ratios.
The concern is not about current conditions, but about how these structures perform under stress. SRT transactions must be renewed as they mature, leaving banks dependent on continued investor demand. In a downturn, that demand could weaken, making rollovers more difficult or more expensive.
Supervisors are paying close attention. “Our job is to ensure resilience. A recession will come sooner or later. We must ensure these structures can withstand it,” said Jean-François Carpantier, head of risk at the macro-prudential division of Luxembourg supervisor CSSF, at a recent conference in reference to SRT risks.
Consolidation pressure
Consolidation is expected to remain a theme in 2026. Scope identifies banks with sufficient financial headroom for acquisitions, including BNP Paribas, Crédit Agricole, Intesa Sanpaolo, UniCredit, ING, DNB and Nordea. Others, such as ABN Amro, Caixabank, Société Générale and Commerzbank, have less capacity.
Cross-border mergers remain difficult. National supervision, political considerations and differences in insolvency and deposit-guarantee regimes continue to favour domestic or regional deals, said Scope. The rating agency expects most activity to focus on smaller acquisitions that strengthen core businesses, technology platforms or fee-based income, rather than large transformational mergers.