The Bank for International Settlements released its Annual Economic Report warning that record sovereign debt held by non-bank investors has created a financial stability risk, as Morgan Stanley gated a private credit fund for the second consecutive quarter. The same week, France's audit office said all its fiscal signals are flashing red, the European Parliament advanced the digital euro and Japan signalled its hiking cycle has further to run.

Meanwhile, Singapore's Monetary Authority established a dedicated body to coordinate industry-wide AI and tokenisation deployment across institutions of all sizes.

Read more on the week's key developments:

1. BIS annual report identifies leveraged non-bank sovereign debt as new systemic risk

The Bank for International Settlements released its Annual Economic Report on 28 June, warning that record sovereign debt has created a new financial stability risk. General Manager Pablo Hernandez de Cos called the message one of urgency. The report cited four pressure points including entrenched inflation, leveraged non-bank holders of sovereign debt, AI investment financed through debt and vulnerabilities among non-bank intermediaries.

Frank Smets, acting head of the monetary and economic department, said the new fiscal-financial stability nexus may bring more frequent and sharper drops in sovereign bond values. The BIS urged policymakers to prioritise price stability, ensure fiscal sustainability and strengthen oversight beyond banking. For banks, the report reinforces the case for including sovereign bond price volatility in capital and liquidity stress scenarios.

2. All 32 US banks clear Fed stress test despite $708 billion in projected losses

The Federal Reserve's 2026 stress test results, released on 24 June, confirmed that all 32 large banks remained above minimum capital requirements despite $708 billion in projected losses under a severely adverse scenario modelling 10% unemployment, a 39% fall in commercial real estate prices and a 58% drop in equity markets. Capital declined only 1.6 percentage points in aggregate. Credit card losses accounted for $200 billion at a loss rate of nearly 17%, little changed from prior years.

JPMorgan, Goldman Sachs, Morgan Stanley and Wells Fargo raised dividends after the results. Stress capital buffers stay fixed until 2027 as the Fed revises its methodology, meaning this cycle's results do not change capital requirements for any bank.

3. Morgan Stanley's second-quarter gating signals sector stress

Morgan Stanley's North Haven Private Income Fund capped investor exits for the second consecutive quarter, fulfilling only 43% of redemption requests after demand reached 11.6% of units outstanding against its 5% cap. BlackRock's $26 billion HPS Corporate Lending Fund, Cliffwater's $33 billion fund and Blackstone's BCRED have all gated in recent quarters too, with BlackRock also repeating in consecutive quarters.

Requests at BlackRock rose to 13.3% of shares from 9.3% in the first quarter, while Cliffwater gated at 7% after 14% demand and Blackstone capped at 5% after 10% demand. The pattern across four unrelated managers suggests the pressure is sector-wide. For banks with exposure to non-bank lenders, this warrants closer monitoring of liquidity conditions.

4. France's national audit office declares all fiscal signals red as French debt heads toward $3.9 trillion

France's Cour des Comptes, the national audit office, presented its annual assessment of public finances on 25 June, less than a year before the presidential election. Chamber president Carine Camby said at the opening: "We can say that all signals are red." The court projects public debt reaching 118.5% of GDP in 2026, equivalent to over EUR 3.62 trillion ($3.92 trillion), with interest costs rising EUR 12 billion ($13.0 billion) to EUR 77.4 billion ($83.8 billion).

The 2025 deficit improvement to 5.1% of GDP came entirely from tax rises rather than spending cuts, the court noted, while expenditure grew faster than the economy. The government's 5% deficit target for 2026 is described as far from guaranteed, and interest costs are projected to reach EUR 100 billion ($108 billion) by 2029, equivalent to 3% of GDP. For banks active in French sovereign debt, the path of the OAT-Bund spread and forthcoming rating agency reviews are the near-term triggers to monitor.

5. EU lawmakers advance digital euro legislation, ECB scraps 40 supervisory documents

The European Parliament's ECON Committee adopted its position on the digital euro by 43 votes to 14 on 23 June, with one abstention, clearing the way for a plenary vote. Basic services including account opening, holding and payment would be free, offline payments would carry no charge and holding limits would be set by the Commission on ECB recommendation. Selected pilot providers will be notified of outcomes by end of June, with development starting in the third quarter of 2026 and a 12-month pilot from the second half of 2027, ahead of possible issuance in 2029 assuming legislation is adopted this year.

On 26 June the ECB also said it would discontinue around 40 of 130 supervisory documents as outdated, including its draft guide on governance and risk culture, to be replaced by a good practices report in 2027. For banks in the euro area, the governance guide demotion reduces one layer of near-term supervisory pressure while the digital euro's legislative progress moves distribution and AML/KYC architecture from concept to planning horizon.

6. Binance suspended from EU from 1 July after MiCA licence application collapses

Binance told customers in France, Italy, Spain and Poland on 26 June that it will suspend EU services from 1 July after failing to secure a MiCA licence by the 30 June deadline. The exchange had applied through Greece as its chosen passport jurisdiction but withdrew the application on 24 June before any formal decision, citing the timeline of the process. Binance disputes that its application was rejected, saying the regulator found it compliant.

It says user funds remain safe, and it plans to seek a licence through France instead. Of more than 3,000 crypto firms previously active in the EU, only around 210 secured MiCA authorisation by the deadline. For regulated European banks and payment institutions already holding MiCA licences, the suspension creates a competitive opening.

7. MAS sets up Future of Finance Institute to move AI and tokenisation beyond pilots

The Monetary Authority of Singapore announced the Future of Finance Institute on 25 June at the Association of Banks in Singapore Annual Dinner, with the announcement made by Deputy Prime Minister and MAS Chairman Gan Kim Yong. The institute will focus initially on AI and tokenisation, helping move both from industry experimentation toward broad-based adoption across financial institutions of all sizes.

Its four components are a Knowledge Hub of validated use cases and deployment playbooks, an Innovation Garage pooling research across institutions, Industry Sandboxes for testing programmable money and tokenised assets and Implementation Toolkits including an updated AI Risk Management Toolkit covering agentic AI safeguards. It builds on existing platforms including MindForge, PathFin.ai, Project Guardian and Project Orchid. For banks with operations or ambitions in Singapore, the FFI represents a structured platform for engaging with AI and tokenisation deployment ahead of standards being finalised.

8. MSCI upgrades Greece, sets November deadline for Indonesia and Turkey

Morgan Stanley Capital International's 2026 Annual Market Classification Review, released on 23 June, confirmed Greece for developed market status from the May 2027 Index Review and upgraded Bulgaria to frontier market status on the same date. Indonesia was kept in emerging markets but warned that insufficient progress on transparency and free-float rules by November could trigger a frontier market consultation. Goldman Sachs estimates a downgrade would force up to $13 billion in passive fund outflows. Since MSCI's January transparency warning, approximately $370 billion in Jakarta Composite Index value has already been erased.

Turkey received a similar warning over coordinated trading that has inflated free-float estimates. South Korea stayed in emerging markets, with MSCI again citing limited won convertibility and restrictions on in-kind transfers, and no fresh review date was set. The review carries direct reallocation consequences for index-tracking portfolios and reopens Indonesia and Turkey exposure questions ahead of November.

9. Standard Chartered explores Bahrain retail exit as HSBC and Citi pattern continues

Standard Chartered announced on 23 June that it is exploring the sale of its wealth and retail banking business in Bahrain, with a transition expected to take 18 to 24 months subject to regulatory approval. Corporate and investment banking operations in the kingdom are unaffected. Bongiwe Gangeni, head of wealth and retail banking for Europe, the Middle East and Africa, said the bank would keep investing in the region.

The move follows a wider pattern. HSBC sold its Bahrain retail business to Bank of Bahrain and Kuwait in 2025, and Citigroup sold its Bahrain consumer business to Ahli United Bank in December 2022. Standard Chartered says the move reflects its global focus on cross-border corporate banking and affluent wealth management. Local and regional banks in Bahrain now have a retail book to bid for.

10. BOJ's Tamura calls for hikes every few months toward 2% neutral rate

Bank of Japan board member Naoki Tamura said in a speech in Kobe on 25 June that the policy rate should rise by 25 basis points at intervals of a few months toward a neutral rate of around 2%. He said underlying inflation has already reached the 2% target and that the BOJ should speed up hikes if upside price risks intensify.

Tamura said Japan's policy rate remains below neutral with inflation expectations not yet firmly anchored, unlike the position now held by the Federal Reserve and the ECB. He also disclosed he voted against the board's decision to pause JGB tapering from the next fiscal year, arguing the BOJ should normalise its balance sheet as quickly as possible. His remarks broadly echo the BOJ's June Summary of Opinions, published on 24 June, which showed broad board support for continued tightening. For Japanese megabanks the path reinforces NIM expansion; for institutions with yen funding costs or JGB holdings, accelerating taper expectations add pressure to the long end of the curve.

What to watch

Bank of Korea rate decision (16 July); US bank Q2 results begin (week of 13 July); ECB rate decision (23 July); Federal Reserve FOMC meeting (28-29 July); Bank of Japan policy meeting (30-31 July).

The Asian Banker Weekly Brief is a roundup of the biggest macroeconomic, industry and regulatory developments affecting banking globally.