Could European Banks Be at the Epicenter of the Next Financial Crisis?

European banks - especially the largest from the UK, Spain, France, and Italy - have generally fortified their capital positions since the global financial crisis. Capital buffers today are stronger, but vulnerabilities remain.
‍

At the heart of this conversation is the CET1 ratio, short for Common Equity Tier 1 ratio. This is the most important measure regulators use to gauge a bank’s strength. It compares a bank’s highest-quality capital (like common shares and retained earnings) against its risk-weighted assets. In plain English: it tells you how much real loss-absorbing capital a bank has to protect itself if things go wrong. The higher the CET1 ratio, the safer the bank is considered.

CET1 Ratios Before the 2008 Crisis

Before 2008, there was no CET1 ratio as we know it today. Banks were regulated under Basel II, which used broader capital adequacy ratios (Tier 1 and Tier 2 capital) that often allowed weaker forms of capital (like hybrid instruments) to count as buffers.

In practice, many large banks entered the crisis with Tier 1 ratios in the 7–8% range, but only about 2–3% of that was “pure equity capital” (what we’d call CET1 today).

For example:

U.S. and European investment banks like Lehman Brothers, RBS, and UBS had tangible common equity ratios under 4%, far below what Basel III later required.

By contrast, today’s big European banks run CET1 ratios of 12–16%, roughly 4–5x stronger than pre-crisis levels. Let's get into the key banks and where things stand today.

United Kingdom (Barclays, HSBC, Lloyds, NatWest)

The Bank of England’s 2025 Financial Stability Report emphasizes that UK banks remain resilient. Capital levels are “broadly appropriate,” though risks tied to leveraged corporate debt and repo markets linger. Lloyds Banking Group, for example, reported a CET1 ratio of 13.8% in mid-2025, reflecting solid capitalization.

Spain (Banco Santander, BBVA, CaixaBank)

Spain’s major banks maintain healthy buffers: Santander’s CET1 ratio stood near 13%, BBVA’s at 13.3%, and CaixaBank’s at 12.25% by mid-2025. Non-performing loans remain low, with CaixaBank’s NPL ratio just 2.3%.

France (BNP Paribas, Crédit Agricole, Société Générale)

France’s leading banks are classified as Global Systemically Important Banks (G-SIBs), subject to strict oversight and capital requirements. While specific CET1 updates vary, these institutions are closely monitored by the ECB, which has highlighted their strong liquidity positions.

Italy (Intesa Sanpaolo, UniCredit)

Italian banks have improved markedly: Intesa Sanpaolo reported a CET1 of 13.5%, while UniCredit reached 16.2%, one of the highest levels among European peers.

Bottom line: Across these nations, the major banks carry CET1 ratios generally ranging from 12–16%, suggesting solid capitalization.

‍

Could a Crisis Be Triggered?

Despite these strong buffers, there are structural vulnerabilities that could serve as catalysts for a broader financial shock:

Valuation Risk from Complex Instruments

European banks hold trillions in so-called “Level 2 and Level 3” assets - financial instruments without transparent markets. Even small valuation shifts could meaningfully impair capital.

Global Trade and Geopolitical Pressures

The ECB has warned that geopolitical fragmentation, trade tensions, and regulatory divergence could create stress points in the system.

‍

Leverage in Shadow Finance

The Bank of England continues to flag risks in market-based finance - hedge funds, private equity, and repo markets - which could amplify any downturn.

‍

Implications for North American Markets

A crisis triggered by European banks would not remain confined to Europe. The knock-on effects could spread rapidly through interconnected markets.

Market Contagion: Equity sell-offs and bond volatility would ripple across U.S. and Canadian markets, especially as investors reduce risk.

Cross-Bank Exposures: North American banks with exposure to European funding channels could face liquidity strains.

Currency Shifts: Stress in European banking could drive safe-haven flows into the U.S. dollar, weaken the euro, pressure the Swiss franc, and influence the Canadian dollar via risk sentiment and commodity prices.

The Bottom Line for Investors Watching Europe’s Banks

European banks are more resilient today than during the 2008 financial crisis, but resilience doesn’t equal immunity. With trillions in complex assets, growing exposure to shadow finance, and mounting geopolitical risks, the chance of a European-triggered shock remains real.

‍

If contagion begins in Europe, it won’t stay there. A sudden crisis in London, Madrid, Paris, or Milan could ripple through equity markets, tighten credit conditions, and trigger safe-haven flows into the U.S. dollar - putting pressure on the euro, the Swiss franc, and even the Canadian dollar.

‍

For North American investors, the takeaway is clear: keep one eye on Europe. In today’s interconnected markets, what happens in the eurozone’s banking sector can reshape global capital flows in a heartbeat, and potentially ignite the next major financial downturn.

‍