Banking & capital markets

European banks enter 2026 in a strong position, having withstood significant geopolitical and macroeconomic headwinds in 2025 without being blown off course. While 2026 may bring its own headwinds – such as declining interest rates and continuing competition from alternative lenders – strong capital and liquidity positions offer a robust level of resilience.

Yet uncertainty clouds the horizon. New, hybrid risks are emerging as structural forces such as geopolitical fragmentation and technological development reshape the operating environment. Efforts to boost growth and competitiveness by reducing the regulatory burden on banks have widened the range of potential regulatory outcomes and increased global regulatory fragmentation.  

These factors place an increasing emphasis on banks’ ability to develop a forward-looking view: anticipating the outcome of the simplification and competitiveness agenda, identifying and adjusting to risks emerging from new sources, and seizing the opportunities arising from the changing landscape.  

Regulatory (R)evolution 

Despite political momentum, banking-specific “simplification” efforts in the EU and UK were limited in 2025. However, more meaningful change may be on the horizon. Governments and regulators are considering material changes to key pillars of post-crisis reform – including the Senior Managers and Certification Regime, the UK ring-fencing regime, and the capital buffer framework.  

It is no surprise that policymakers have turned their attention to the capital buffer framework. Reform offers tantalising benefits – from reducing complexity to freeing up additional capacity to finance growth.  

There are positive signals from regulators about their appetite for change in this area. The Bank of England’s (BoE) Financial Policy Committee (FPC) proposed reducing its benchmark for the appropriate capital level for the UK banking system by 1 percentage point (from 14% of Tier 1 capital to 13%), albeit without making any immediate changes to individual banks’ capital requirements.  

In the near term, UK regulators plan to review local requirements and instances of “gold-plating” above international standards (such as the UK leverage ratio framework, including the use of buffers within it, and double-counting in the treatment of domestic exposures). More broadly, the FPC has indicated that it will work with the Prudential Regulation Authority (PRA) and international authorities to enhance the usability of capital buffers. It remains to be seen whether UK banks will reduce the size of their “management buffers” above regulatory requirements in response – realistically, this may not happen until banks know the results of the UK regulators’ ongoing reviews.  

In the EU, the Commission will publish its report on the EU banking sector’s competitiveness towards the end of this year. However, the European Central Bank’s (ECB) recommendations for simplifying banking rules, published in late 2025, indicated its appetite for a fundamental review of the capital framework – including simplified capital buffers (consolidating existing capital buffers into a releasable and non-releasable buffer), and either abolishing or significantly altering the role of non-common equity Tier 1 instruments (Additional Tier 1 and Tier 2).  

Given the need for legislative change (and the challenge in securing political agreement on the details of the ECB’s recommendations and other proposals that emerge from the Commission’s report), we do not expect any changes to take effect until 2028, at the earliest.  

UK and EU policymakers will also face a dilemma – either waiting for international agreement on more radical changes (which, by the Basel Committee’s own admission, is currently difficult to achieve¹), or diverging from international standards. If they wish to move more quickly, they will almost inevitably have to diverge.

The UK has more room for manoeuvre on its ring-fencing regime. Here again, the range of policy options is wide, albeit constrained by the Government’s position that the ring-fence will remain in place. We expect moves to enable ring-fenced banks to draw more heavily on IT and other services provided by other parts of their group, but that change alone is unlikely to meet the Government’s objective of boosting UK banks’ capacity to finance growth.  

Banks that can provide robust evidence for more fundamental changes – for example, related to the flow of financial resources across ring-fenced groups, or solo-level requirements for ring-fenced entities - may find they are pushing at an open door. Indeed, the BoE has indicated that it will review the application of the output floor to ring-fenced sub-groups, albeit only after Basel 3.1 has been implemented in 2027.  

These changes will take some time to agree, legislate and implement. While the end result may be positive, simplification initiatives have, paradoxically, introduced additional regulatory fragmentation for cross-border banks by increasing the number of differences between UK and EU regimes. If UK and EU regulators do not coordinate their simplification efforts, there is a risk that this additional cross-border complexity dampens the aggregate positive effect of well-intentioned simplification initiatives. Domestic banks will see more immediate benefit.  

The additional complexity for cross-border firms is compounded by ongoing uncertainty over international consistency of the Basel framework. Indications are that the US will repropose its Endgame package in H1 2026, with finalisation occurring in late-2026 or 2027. Endgame proposals may reduce capital requirements for smaller firms, while net changes are likely to be more modest for larger firms, compared to the initial proposal.  

Whatever the US approach may be, significant change to UK/EU banking book approaches is unlikely. The medium-term future of the Fundamental Review of the Trading Book (FRTB) is, however, less certain if the US does not commit to its implementation. We see standardised FRTB enduring: the prospect for modelled approaches is less clear. 

In the meantime, banks that provide cross-border core banking services into the EU from third countries will need to finalise their preparations for Capital Requirements Directive 6 (CRD6) restrictions on these services. Member States were due to transpose CRD6 by 10 January 2026. As of 10 January 2026 transposition had been completed in 3 out of the 27 Member States.

While transposition provides some clarity, it will not answer all of the industry’s questions. Banks will need to decide their strategies before the grandfathering period ends on 11 July 2026, most likely without clarity over key issues such as reverse solicitation boundaries and Markets in Financial Instruments Directive ancillary services. Despite these challenges, banks should develop their compliance approach, validating assumptions with peers through industry working groups and other specialist forums. This will necessitate a review of booking arrangements to ensure alignment with the final European Banking Authority requirements.² 

Booking models will be in focus in the UK where banks should continue to execute their individual enhancement plans and prepare for feedback from the PRA on their self-assessment against updated Supervisory Statement 5/21expectations. The PRA focus will likely be on documentation of permitted booking practices, management information (MI), remote booking supervision and demonstrating an effective balance between detective and preventative controls.  

Market changes – efficiency is the byword 

For wholesale banks and capital markets firms, a focus will be on enhancing efficiency, including anticipated changes to transaction reporting. The Financial Conduct Authority (FCA) is consulting on improving the transaction reporting regime – whilst this may make reporting more efficient, it may also lead to divergence between the UK and EU approaches and further complexity.  

Discussions with market practitioners suggest that transaction reporting is a rising compliance priority for wholesale banks and capital markets firms, with change projects likely to be large and costly. Firms should develop changes to existing processes and assess how to tackle potential UK/EU divergence. They should also ensure sufficiently senior ownership and effective governance for transaction reporting, as poor performance here can have significant knock-on effects, compromising market abuse detection and risk management and increasing supervisory scrutiny and reputational damage.  

2026 is the final full year before T+1 transition in the UK and Europe. In October 2025, the European Securities and Markets Authority (ESMA) published Level 2 requirements setting deadlines for pre-settlement processes as early as December 2026 to facilitate the transition.  

While some firms are waiting for ESMA to finalise its “user manual” before moving forward, those EU firms that have made a start have encountered challenges related to: standardised settlement instructions; partial settlement; securities financing transactions, and testing – and have generally found transition to T+1 in the EU to be more complex than it was in the US. Successful transition will rely on firms executing tailored implementation plans, based on impact analyses that should have been completed in 2025.  

In addition to transaction reporting and T+1, firms will need to finalise their preparations for mandatory centralised clearing of cash US Treasury transactions by the end of 2026.  

Supervision against an uncertain backdrop 

As the simplification agenda has gathered momentum across Europe, banking supervisors are seeking to use their resources more efficiently. For instance, the ECB’s reformed Supervisory Review and Evaluation Process (SREP) will be more “targeted, efficient and risk-based”, and will use a new “tiered” approach to supervisory findings that allows firms to address less severe findings internally. In the UK, the FCA is intending to take a more risk-based approach to supervision, particularly in areas where firms can demonstrate they are “doing the right thing for consumers”.  

However, resources redirected does not necessarily mean resources reduced. Supervisors are sharpening their focus on whether banks can maintain their current resilience in the face of heightened geopolitical and cyber-related risks, rapid technological change, and increasing interconnectedness between the banking sector and non-bank financial institutions. 

Asset quality has shown little sign of deterioration (so far) as a result of turbulence in 2025. However, supervisors remain vigilant to pockets of risk, including in long-standing areas such as small and medium-sized enterprises and commercial real estate lending, and in relation to export-oriented sectors most exposed to trade restrictions. More generally, they want to ensure that banks’ credit standards remain robust (with the ECB planning a review of credit underwriting standards and loan pricing in 2026).  

Supervisors also want to understand the risks that are emerging from structural changes to credit markets – in particular, the emergence of private credit as an alternative to bank lending. In early 2026, the BoE will kick-off a system-wide exploratory scenario focused on the private markets ecosystem, including private credit.  

While not all banks will have significant direct exposure to private credit, explored further in our private markets op-ed, all banks will need to demonstrate capabilities to map and report internally and to supervisors their understanding of the second and third order effects of stress emerging in the private credit sector. This will require them to demonstrate their understanding of correlations under stress, which of their bank and non-bank counterparties are most exposed to problems in the private credit market and how they will be affected by problems in this market.  

More generally, banks must demonstrate that core capabilities are evolving to keep pace with the risk environment. This will result in continuing focus on data, stress testing, operational and cyber resilience, governance and risk culture, and resolvability.  

Clear individual accountabilities and incentives to address supervisory feedback will become all the more important for EU banks in the face of a new individual accountability framework set to be implemented through CRD6. In the UK, regulators have sought to strengthen individual accountability and link remuneration incentives more directly to addressing concerns expressed in supervisory periodic summary meeting letters. 

Data remains a remediation priority for supervisors in both the UK and EU. While some banks still have work to do to get the basics right, they must also show that their data capabilities are evolving to support effective identification and modelling of emerging risks, and enable the bank to deliver rapidly varying views of its exposure to sectors, products and geographies. Boards and senior management teams must demonstrate that their MI allows them to steer the bank effectively and that they use tools such as stress testing and scenario analysis to help them identify and respond to future challenges.  

The ECB’s 2026 geopolitical risk reverse stress test (RST)³ will be a real test of the maturity of banks’ modelling, scenario generation and decision-making capabilities. We expect supervisory scrutiny of geopolitical risk management to endure beyond the ECB’s exercise, influencing SREP scores on business model sustainability, risk management and governance, and operational / ICT risk.  

Understanding how upstream geopolitical risks flow through to financial risks (expanding on the ECB’s transmission mechanism map in Figure 1) is a key task for all banks. The events of 2025, (including, but not limited to, the April 2025 tariff-related shock) provide a valuable test case, and banks can begin to gather historical data on the impact on different risk domains, and identify where investment in capabilities or strengthened governance are required. 

Source: ECB⁴

As with private credit, the impact of geopolitical risks on banks will often be second or third order. Effective risk identification and management will require banks to strengthen their understanding of their clients’ value chains. Doing so will require increased engagement with counterparties by the first line of defence, supported by appropriate first-line accountability for managing risk. Should the geopolitical RST deliver compelling insights, we expect that supervisors will look to use RSTs to assess other risks. 

In addition to risks stemming from international sources, UK banks face a more parochial issue. The motor finance redress scheme will require considerable resources in 2026. The FCA is expected to finalise the scheme rules in February or March, with consumer payouts commencing later in 2026.  

Key challenges include the short timeframe to pay compensation to those who have already complained (c.4m customers); identifying new in-scope customers (due to the need for data and agreements from possibly as far back as 2007); and managing a complex communications plan with up to c.14.2m customers, all the while evidencing compliance with the scheme’s requirements. Many banks have already strengthened their provisions for the costs of the scheme while others may still have to do so when the final rules determine the full scale of the task ahead. 

Not all doom and gloom 

Uncertainty also presents opportunities: the challenge for banks is identifying those opportunities that are worth the cost of pursuit.  

For example: in the UK, the PRA has raised the intriguing possibility of a foundation internal ratings based (FIRB) approach for mortgage lending for medium-sized banks. However, the policy discussion is at a very early stage, and medium-sized banks already on a trajectory to advanced internal ratings-based (AIRB) will have to decide whether to “stick or twist” on further investment until further clarity on the PRA’s approach emerges.  

This is a difficult strategic decision, given uncertainty around the calibration and permanence of any potential FIRB approach. In practice, we expect banks that have already developed their loss given default and exposures at default models for AIRB are more likely to proceed as planned. Those with fewer sunk costs (or those further back in the model approval “queue”) are better placed to take a “wait and see” approach, retaining the option to switch to FIRB once the PRA’s policy becomes clearer. 

In December, the FCA published its final rules on Targeted Support (TS). The regime’s main objective is to narrow the advice gap to foster better outcomes for customers and is due to launch in April 2026. We see TS as having the potential to transform the retail pensions and investment market. However, developing a TS pathway is likely to require significant strategic decisions and investment.  

Retail banks with established investment arms might find it easier to develop a TS offering, leveraging their access to customer data and their own product offerings. Others, such as building societies reliant on cash-deposits, must consider the TS threat and weigh up the benefits of partnering with third parties. We expect solving data challenges and operational complexity to be crucial for TS success. 

Elsewhere, increasing market momentum and regulatory clarity will enable banks across Europe to assess how to engage with stablecoins and tokenised bank deposits in 2026. See our digital assets and payments op-ed for further details.  

Final thoughts 

In a year that will be dominated by macro-level uncertainty, banks will need to demonstrate that their data, risk management and governance are up to the task of steering a path through the challenges. Banks will need to show they are making risk-sensitive, well analysed decisions – with appropriate governance – about which opportunities to pursue, while ensuring horizon scanning is doing its job, and keeping an eye on long-running supervisory priorities.