The global banking industry approaches 2026 in a period of relative calm that contrasts sharply with the volatility experienced earlier in the decade. Inflation has moderated across most major economies, financial conditions have eased and banking systems remain well capitalised. Yet the International Monetary Fund (IMF)’s World Economic Outlook (January 2026) makes clear that this stability reflects a transition to lower trend growth rather than a return to pre-pandemic momentum, with global output projected to expand at 3.3% in 2026, upgraded from its October 2025 figures, and advanced economies growing at roughly 1.8%. Meanwhile, inflation is projected to fall to 3.8% globally in 2026, with divergence across regions . This moderation is structural rather than cyclical. The IMF highlights persistent constraints on productivity growth, demographic ageing in advanced economies and the enduring impact of trade fragmentation and geopolitical tension, precipitated by China-United States (US) rivalry. It also assumes trade policy uncertainty remains elevated through 2025 and 2026, shaping cross-border activities and the growth outlook. These forces reduce the scope for broad-based credit expansion and shift banking activity towards more selective, policy-aligned and capital-intensive segments of the economy. Since the publication of IMF’s outlook in October 2025, late-year data releases have pointed to firmer near-term momentum in parts of the global economy than earlier anticipated. In the US, economic activity remained resilient into the final quarter of the year, supported by consumption and services demand, while China reported stabilisation in industrial activity and exports ahead of its year-end growth release. These developments improve short-term operating conditions for banks, particularly in transaction activity and capital markets, but they do not materially alter the IMF’s assessment that global growth is settling at a structurally lower pace, constrained by productivity, demographics and policy fragmentation. Financial markets, however, project a more benign outlook. Equity prices have recovered, volatility measures remain subdued and credit spreads have narrowed. The IMF’s Global Financial Stability Report (October 2025) cautions that this apparent calm masks accumulating vulnerabilities, including elevated asset valuations, stretched equity and credit valuations, and renewed revaluation risk from rising sovereign borrowing needs and higher interest-rate and valuation sensitivity, as well as a continued migration of risk outside the traditional banking sector. Private-sector outlooks broadly reinforce this assessment. Standard Chartered’s Global Market Outlook 2026 points to an environment characterised by dispersion rather than synchronised risk-taking, while Capital Group’s 2026 outlook notes that improved market breadth remains highly sensitive to liquidity conditions and confidence in core fixed-income markets that underpin bank balance sheets. At the same time, the structure of global finance is evolving. S&P Global Market Intelligence in its annual report for 2026 describes it as the “age of agility”, shaped by trade policy volatility, global regionalisation and strategic competition. For banks, this environment increases complexity across balance sheets, client relationships and regulatory obligations, making resilience increasingly dependent on execution rather than scale. Together, slower growth, geopolitical fragmentation and technological acceleration are reshaping not only bank balance sheets but also the infrastructure through which global finance operates. Trade routes, payment systems, settlement mechanisms and currency usage are increasingly influenced by political alignment and policy risk, while digitalisation is altering how banks manage cost, risk and execution. In this environment, stability in 2026 depends less on cyclical tailwinds and more on institutional discipline, resilience across currencies and corridors, and the capacity to operate credibly within a more fragmented global financial system. Slower growth and a recalibrated global economy Economic growth in 2026 remains positive but subdued. The IMF projects that global trade expansion will continue to lag historical averages as policy uncertainty, industrial strategy and geopolitical realignment reshape cross-border activity. Growth is increasingly driven by domestic demand and public-sector investment rather than synchronised global expansion. For banks, this alters the composition of credit demand. Corporate lending growth is increasingly concentrated in sectors aligned with policy priorities such as energy transition, infrastructure and advanced manufacturing. Smaller firms and more cyclical sectors face tighter credit conditions, reflecting weaker pricing power, higher refinancing risk and more cautious underwriting standards. Indosuez Wealth Management’s Global Outlook 2026 characterises this phase as a structural recalibration rather than a retreat from globalisation. Supply chains are being re-routed and reconfigured rather than dismantled, reshaping sectoral and geographic exposure for banks rather than eliminating cross-border activity altogether. Regional divergence is increasingly pronounced. ING’s Asia Outlook 2026 highlights that weaker export performance in 2026, as the World Trade Organization (WTO)’s projections suggest global trade volume growth is expected to slow sharply in 2026, even as investment growth remains concentrated in the technology sector, with strength centred in key tech-export and supply-chain diversification beneficiaries. Policy responses shape how slower growth affects banking systems. Governments increasingly rely on fiscal tools to support activity, raising public borrowing needs. Supervisory authorities are therefore more attentive to the interaction between growth, fiscal expansion and bank balance sheets, particularly where sovereign exposure increases and market sensitivity to public debt intensifies. Geopolitics reshapes cross-border trade, supply chains, payments and settlement Geopolitical fragmentation has become a defining structural force shaping global economic and financial conditions. Trade policy, national security considerations, sanctions regimes and strategic competition increasingly influence how goods, capital and financial services move across borders. The IMF notes that geopolitical tensions have already contributed to a reconfiguration of global trade patterns, reducing efficiency and increasing costs without reversing global integration. Geopolitical risk intensified again towards the end of 2025, reinforcing the IMF’s assessment that fragmentation is no longer a background condition but an active constraint on global finance. In East Asia, diplomatic tensions escalated after public remarks by Japanese Prime Minister Sanae Takaichi linking a Taiwan contingency to Japan’s national security, prompting strong responses from China and increasing risk premia across regional trade and currency markets. In parallel, the conflicts involving Ukraine and Russia and the ongoing war in Gaza continued to shape energy markets, shipping routes and investor confidence, while renewed tension between the US and Venezuela underscored the persistence of sanctions-related operational and compliance risks for global banks. Supply chains are no longer optimised solely for cost and speed. Resilience, redundancy and political alignment have become central considerations for corporates, particularly in sectors such as technology, energy and critical inputs. For banks, this reshapes demand for trade finance, inventory financing and supply-chain solutions, with exposure increasingly concentrated along regional rather than global corridors. These shifts have direct implications for cross-border payments and settlement. As trade routes diversify, payment flows increasingly bypass traditional hubs, requiring banks to maintain more complex correspondent networks and liquidity arrangements. The IMF highlights that sanctions and geopolitical disruptions can increase settlement risk, operational friction and corridor-specific payment constraints. Financial institutions also face higher compliance and operational burdens. Sanctions screening, export-control compliance and counterparty due diligence now play a larger role in shaping cross-border activity. Delays or disruptions in settlement can amplify liquidity stress and intraday funding needs, particularly during periods of heightened geopolitical tension. Supervisory expectations reflect these realities. Regulators increasingly require banks to demonstrate robust contingency planning, operational resilience and compliance capabilities for geopolitical shocks. In 2026, the ability to intermediate safely across politically fragmented systems has become a core banking capability rather than a specialised function. Currency systems and reserve dynamics in a fragmented world Currency dynamics are a central transmission channel through which geopolitics affects banking. The US dollar (USD) remains the dominant reserve, invoicing and settlement currency, underpinning global trade, commodities pricing and international banking. Its central role continues to provide liquidity and stability, particularly in times of stress. At the same time, the IMF notes that geopolitical considerations are influencing settlement practices and cross-border financial arrangements. Motivated by geopolitical considerations and sanctions risk, some economies are seeking to reduce reliance on a single currency system. This shift is incremental rather than disruptive, but it increases complexity for banks managing multi-currency liquidity and funding. The euro (EUR) plays a significant regional role, particularly within Europe and neighbouring markets, but its global reach remains constrained by fragmented capital markets and differing fiscal frameworks. EUR-denominated trade and finance are important for regional banks, but less dominant globally. The renminbi (RMB)’s role in trade settlement has expanded, particularly within Asia and in bilateral arrangements involving China. Indosuez observes that RMB usage in trade finance continues to increase, although capital controls and limited convertibility constrain its role as a full reserve currency. This creates corridor-specific liquidity and hedging challenges for banks. Fragmentation across currency systems affects funding costs, settlement risk and hedging strategies. Standard Chartered’s Global Market Outlook 2026 points to greater dispersion across markets and elevated risks from policy and geopolitical shocks. For banks operating across multiple currency zones, this translates into greater sensitivity in foreign exchange (FX) and cross-currency funding markets, raising operational and liquidity management demands. Financial stability risks beneath calm markets Despite subdued volatility, financial stability risks remain elevated. The IMF warns that asset valuations in several markets appear stretched relative to underlying earnings and growth prospects, increasing sensitivity to negative shocks from policy shifts, geopolitical events or macroeconomic disappointments. Late-2025 market conditions illustrate this tension clearly. Equity markets remained buoyant into year-end, supported by strong performance in technology-related sectors and optimism around artificial intelligence-driven productivity gains. The IMF cautions, however, that such concentration increases vulnerability to abrupt re-pricing if earnings, adoption or regulatory expectations disappoint. For banks, this creates a dual exposure: near-term support for capital markets and client activity, alongside heightened sensitivity of collateral values, funding conditions and risk sentiment to technology-led market swings. Sovereign bond markets are a central concern. Rising issuance to fund fiscal programmes has increased duration risk and reduced the reliability of government bonds as shock absorbers. The IMF highlights that forced selling by investment funds under adverse scenarios could amplify volatility and transmit stress across markets critical to bank liquidity and collateral management. Market participants echo these concerns. Standard Chartered notes that credit risk is increasingly assessed through the lens of systemic versus idiosyncratic events, raising the risk that sentiment-driven repricing could spill across asset classes, even in the absence of a single dominant shock. Banks remain exposed through multiple channels. Trading books, collateral values and wholesale funding markets respond rapidly to shifts in confidence. While capital buffers are strong, liquidity dynamics can deteriorate quickly if market functioning is impaired, particularly in core government bond and foreign exchange markets. Regulatory authorities have responded by strengthening stress testing and market surveillance. However, the IMF notes that vulnerabilities increasingly originate outside traditional banking activities, reinforcing the need for banks to manage market and liquidity risk proactively rather than relying solely on regulatory backstops or benign conditions. The expanding role of non-bank financial intermediation Non-bank financial institutions play an increasingly central role in global credit provision and market liquidity. The IMF documents the growing participation of asset managers, private credit funds and hedge funds in sovereign bond markets, leveraged lending and structured finance. These institutions provide diversification and flexibility but operate with different liquidity and leverage profiles from banks. This expansion deepens interconnectedness. Banks provide funding, derivatives, custody and settlement services to non-banks, creating channels through which stress can propagate. The IMF highlights that shocks originating in non-bank sectors can transmit rapidly to banks even when bank balance sheets appear fundamentally sound. Capital Group’s 2026 outlook observes that high-quality bonds are regaining importance as stabilising assets within diversified portfolios but emphasises that this stabilisation depends on orderly market functioning even as they regain their stabilising role. Disruptions in non-bank sectors could undermine this role, directly affecting bank treasury operations and liquidity buffers. Cross-border dynamics add complexity. ING points to heightened sensitivity of capital flows and FX markets to geopolitical developments, particularly in Asia. For internationally active banks, this raises hedging costs and funding volatility, reinforcing the importance of robust liquidity management. Supervisory frameworks are evolving, but coordination remains uneven. Authorities are expanding oversight of non-bank activities, yet regulatory perimeters lag financial innovation. Banks must therefore manage counterparty and market exposures conservatively, recognising that institutional safeguards may not fully contain non-bank-driven stress. Digitalisation, AI and digital assets reshape banking fundamentals Digitalisation has moved from a supporting role to a structural driver of banking performance and risk. Artificial intelligence (AI), automation and distributed ledger technologies are increasingly embedded in core banking functions, influencing cost structures, risk management and competitive dynamics rather than serving as peripheral innovation initiatives. Moody’s Ratings’ global AI 2026 outlook expects AI adoption to broaden but with highly uneven productivity gains, because deploying AI into enterprise operations requires redesigning end-to-end processes. As AI is integrated more deeply into workflows, Moody’s Ratings also flags rising operational, cybersecurity and governance risks, including the potential impact of AI-generated errors and increasing cross-border compliance complexity from regulatory divergence. Execution risk, governance failures and model opacity can quickly offset productivity gains. AI adoption also introduces new concentration risk amid the growing reliance on shared data, cloud and AI infrastructure, raising the prospect of correlated operational disruptions across institutions. For banks, this shifts operational resilience from an internal control issue to a system-wide dependency challenge. Digital assets and tokenisation further reshape market infrastructure. The IMF highlights the growing relevance of tokenised instruments, stablecoins and distributed settlement mechanisms for payments, collateral and market plumbing. While these technologies promise efficiency gains, they also introduce new liquidity, legal and operational risks, particularly where regulatory frameworks remain fragmented. Market-facing institutions note similar dynamics. Moody’s Ratings points to tokenisation as an extension of capital markets infrastructure rather than a parallel system, with implications for how banks manage settlement, custody and liquidity. The pace of adoption, however, remains constrained by governance, interoperability and regulatory clarity. Supervisory responses are tightening. Regulators increasingly expect banks to demonstrate explainability, auditability and resilience in AI-driven processes, while digital asset exposures attract closer scrutiny. For banks, digitalisation in 2026 is therefore less about innovation upside and more about disciplined integration, risk control and institutional credibility. Profitability, balance sheets and supervisory expectations After several years of elevated profitability driven by higher interest rates, banks face a more normalised earnings environment in 2026. Net interest margins remain above pre-pandemic levels but are expected to stabilise as policy rates peak or decline gradually. Funding costs remain structurally higher, reflecting competition for deposits and higher risk and maturity premium. Fee-based income becomes increasingly important. Franklin Templeton’s Global Investment Outlook 2026 highlights how fiscal expansion and yield-curve dynamics influence capital flows. It expects steepening yield curves and a weaker USD, with an ‘era of big government’ shaping risk and returns across capital markets. Asset quality remains broadly resilient but uneven. Commercial real estate, particularly office segments, continues to present challenges in some markets. Corporate refinancing risk rises where leverage remains high and earnings growth weakens. Moody’s Ratings’ global banking 2026 outlook is stable, with lower policy rates supporting broadly resilient asset quality, although geopolitical and trade risks remain a source of vulnerability and commercial real estate continues to present risk in some markets. Supervisory expectations reflect these conditions. Regulators emphasise stress resilience, liquidity management and governance rather than headline capital ratios alone. Banks are increasingly assessed on their ability to withstand severe but plausible shocks without reliance on extraordinary policy support. Fiscal dynamics add another layer of scrutiny. As governments expand borrowing, banks’ sovereign exposures attract closer attention. Supervisors seek assurance that balance sheets remain robust even as public debt dynamics become more volatile and politically sensitive. Resilience without complacency Global banking enters 2026 with strengths built over the past decade, including strong capital positions, improved liquidity buffers and more robust risk frameworks. Yet the environment in which these strengths are tested has changed fundamentally. Slower growth, rising sovereign debt, expanding non-bank intermediation, accelerating digitalisation and geopolitical fragmentation now interact directly through trade, payments, settlement and currency systems. Financial calm should not be mistaken for the absence of risk; vulnerabilities are increasingly dispersed across markets, institutions and infrastructures, and can materialise abruptly through currency stress, payment disruption or shifts in political alignment. For banks, resilience in this environment depends on disciplined execution rather than expansion. Managing balance sheets conservatively, pricing risk accurately and integrating technology with strong governance become central strategic priorities. Policy and supervisory frameworks provide essential guardrails, but they cannot eliminate uncertainty. Banks must assume greater responsibility for managing systemic interdependence and market-based risks that extend beyond the traditional regulatory perimeter. Stronger late-year economic data in some major economies and renewed optimism around technology-driven growth should therefore be interpreted with caution. While these developments improve near-term visibility, they do not resolve the structural constraints identified by the IMF, nor do they reduce the exposure of banks to geopolitical shocks, market concentration and fiscal-financial interactions. For banks entering 2026, resilience depends on disciplined execution rather than favourable momentum. Click here to access the full publication.
