• Credit growth projected to remain subdued across most regions
• Nonperforming loans expected to stabilize with gradual improvement
• Corporate refinancing risks elevated as debt maturities rise
• Bank sovereign nexus deepens in debt stressed economies
• Private credit expansion increases contagion risk
• Stablecoin growth poses emerging liquidity competition

Global banking sectors are preparing for another year of cautious lending and heightened vigilance as economic headwinds offset emerging pockets of improvement.

Industry analysis for 2026 points to modest credit expansion across most regions, despite marginal improvement in nonperforming loans.

Persistent trade uncertainty, geopolitical tension and uneven economic growth are expected to weigh on banks’ appetite for new lending.

Roughly three quarters of global banking systems have been expanding credit below long term trends, and that restrained posture is projected to continue.

Emerging Asia and developing markets may show comparatively stronger credit growth, driven by stabilization after earlier deceleration.

However, in advanced economies, competition from nonbank lenders and ongoing risk aversion among banks are likely to keep commercial loan growth subdued.

Nonperforming loans are forecast to stabilize, with more than half of banking sectors expected to see modest improvement. Banks in several jurisdictions are accelerating efforts to offload legacy bad loans.

In the Gulf region, lenders continue to sell NPL portfolios to private investors, while in parts of Asia regulators are encouraging transfers to asset management companies. African regulators are also pressing banks to clean up accumulated distressed assets.

At the same time, corporate balance sheets remain under pressure. Although funding costs have eased somewhat from recent peaks, the lagged impact of earlier monetary tightening continues to strain firms with high debt burdens. Large volumes of debt maturing in 2026 are likely to amplify refinancing risks. Small and medium sized enterprises remain particularly vulnerable due to thinner capital buffers and exposure to floating rate borrowing.

In emerging markets, rising government debt levels are deepening the connection between sovereign risk and bank balance sheets.

Governments increasingly rely on domestic banks to finance local currency borrowing, strengthening the bank sovereign nexus.

Sovereign debt accounts for roughly 15 percent of banking sector assets in emerging markets on average, though exposure is significantly higher in countries such as Argentina, Egypt and Pakistan. In weaker secondary markets, liquidity risks can become more pronounced during stress.

Private credit and nonbank financial institutions are also reshaping the competitive and risk landscape.

Exposures of European banks to nonbank financial institutions represent more than 10 percent of total assets, with U.S. banks reporting similar levels relative to total loans.

This interconnectedness heightens contagion risk if stress spreads through leveraged private credit vehicles. While default rates are not expected to surge in 2026, recent bankruptcies highlight growing counterparty vulnerabilities.

Regulatory scrutiny of nonbanks is intensifying in response. With nonbank assets now accounting for nearly half of global financial assets, supervisors are increasingly focused on leverage, liquidity mismatches and systemic linkages.

A coordinated stress test targeting nonbank institutions is scheduled in Europe in 2026, signaling closer oversight of shadow banking risks.

Profitability across banking sectors is expected to moderate but remain above historical averages. Lower interest rates are compressing net interest margins, and weaker loan growth is likely to limit income expansion.

Banks that have reduced operating costs may be better positioned to sustain returns as rate cycles shift.

Meanwhile, the rise of U.S. dollar linked stablecoins introduces new liquidity considerations for emerging market banks. The ease of cross border transfers and perceived hard currency stability may draw deposits away from local banking systems. Although stablecoins remain primarily used for crypto trading, funding competition could intensify gradually, particularly in economies already accustomed to dollarization.

Banks are responding with deeper fintech partnerships and broader adoption of artificial intelligence to enhance efficiency and diversify revenue.

Yet these technological integrations introduce additional cyber and compliance risks, reinforcing the need for strong governance frameworks.

Regulators’ willingness to provide support in periods of stress remains evident. Since the pandemic, authorities have deployed loan moratoriums and payment deferrals to cushion shocks from trade disputes, geopolitical conflict and natural disasters.

While such measures help contain immediate deterioration in asset quality, they can also obscure underlying vulnerabilities.

As 2026 unfolds, banks face a landscape defined by interconnected risks rather than isolated threats. Stability may improve at the margins, but caution remains the prevailing theme.