Eurozone bank valuations in 2025 soared to levels not seen since before the global financial crisis, but three ECB economists are now warning that the rally may reflect investor overoptimism — and that worsening geopolitical and macroeconomic conditions could unwind it sharply.
The warning comes from Dejan Krušec, Riccardo Meli and Csaba Móré in a study titled “The drivers of the 2025 surge in euro area banks’ market valuations“, published as part of the ECB’s Financial Stability Review (May 2026). The economists conclude that while recent gains are real, rising geopolitical uncertainty and deteriorating macroeconomic prospects could weigh on banks’ earnings outlook and compress equity risk premiums.
The rally was driven by strong net interest income, a favourable ECB interest rate environment and falling non-performing loans, which together attracted significant capital into the sector despite geopolitical turbulence, according to the study. Eurozone banks converged with their US counterparts on profitability during this period, the economists note, adding that “the gap between euro area and US bank valuations has narrowed significantly.”
Cypriot and Greek banks were part of the same positive trend, with analysts upgrading price targets for major institutions including Bank of Cyprus and Eurobank, according to the source report. The Euro Stoxx Banks index posted an annual rally of more than 50% in 2025, the report notes, making banking one of the year’s top-performing sectors.
Shareholder payouts also played a role. The study notes that higher dividend payments up to February 2026, expectations that such payments would continue for the next two years, and a rising rate of share buybacks may have made eurozone bank stocks more attractive to investors.
The warning
The economists are explicit about the risks. High market valuations “could also signal investor overoptimism and compressed equity risk premiums,” they write. If expectations for economic growth or return on equity are not met, those premiums could be repriced sharply.
They add that banks would not necessarily need to raise fresh capital in such a scenario, provided they do not face significant losses. However, a sharp fall in equity valuations “could affect investor confidence and, through higher cost of equity, could also affect banks’ lending behaviour.”
The most concrete sign that the warning is already relevant comes in the study’s final observation: estimates for the first quarter of 2026 suggest that deteriorating macroeconomic conditions and greater financial market volatility following the outbreak of war in the Middle East had already had a negative impact on bank valuations.