Banking risk monthly outlook: July 2025

Our banking risk experts provide insight into events impacting the financial sector in emerging markets in July.

What we're watching:

• Introduction of a bad bank in Bangladesh will likely assist the clean-up of poor assets in the banking sector.
• A forthcoming EU sanctions package is expected to curtail international connectivity of Russian banks.
• Bulgaria’s final EU legal acts-adoption and conversion rate lock ahead of euro adoption in January 2026.
• Argentinean banks will likely increase their debt placements abroad.
• Implementation of public debt law will boost Kuwaiti banks’ sovereign debt holdings.

The introduction of a bad bank in Bangladesh will likely assist the clean-up of poor assets in the banking sector. The Bangladeshi regulator announced the introduction of a management company to remove nonperforming loans (NPLs) from the new entity to be formed from six weak banks. It is likely that the management company will also purchase NPLs from weak state-owned banks. Although the carve out will result in losses from the banks, it will likely reduce ongoing capital needs to provision for these loans and allow banks to restart quality lending.

The forthcoming EU sanctions package is expected to curtail the international connectivity of Russian banks. The forthcoming 18th sanction package set to be imposed on Russia by the EU is expected to further curtail the global connectedness of Russian banks, with 22 additional lenders reportedly set to be added to the SWIFT ban. A widening of the SWIFT ban, paired with the higher risk of secondary sanctions, is likely to entail further cross-border payment and international transaction difficulties for Russian banks and their counterparts.

Bulgaria’s final EU legal acts-adoption and conversion rate lock ahead of euro adoption in January 2026. In June, the European Commission and the European Central Bank confirmed that Bulgaria had met all convergence criteria for euro adoption. Philip R. Lane, a member of the ECB’s Executive Board, said the assessment “paves the way” for Bulgaria to introduce the euro on Jan. 1, 2026, and become the 21st EU member state to adopt the currency. In July, the final EU legal acts will be adopted, and the technical phase will begin. The key milestones adopted in July will support a lowering of Bulgaria’s banking sector risk score. This score change will reflect the anticipated benefits of euro adoption, foreign exchange-related risks and broader economic implications.

Argentinean banks will likely increase their debt placements abroad. Argentina’s economic authorities are removing capital controls and friction to drive external financing and assist foreign exchange reserve accumulation. An active carry trade local market has sustained the demand for government bonds, while the decline in inflation expectations supports a reduction in local currency borrowing costs. Banks have started to benefit from this, with Banco Macro successfully issuing bonds globally. This is a positive development that is expected to continue, likely aiding the funding of foreign exchange credit growth and improving the development of general liquidity levels in banks.

The resumption of government bond sales will stimulate Kuwaiti banks’ asset growth. The Kuwaiti government issued a decree law on public debt in March that outlined a framework for managing public borrowing. The government plans to issue government bonds via the international debt market, as well as domestic financing, for the first time since 2017. As of the first quarter of 2025, sovereign debt holdings only account for 1.8% of total banking sector assets, compared to 12.5% in 2017, when Kuwait last issued government bonds. As Kuwaiti banks start preparing for the operations of official government bond sales, the asset growth of Kuwaiti banks is likely to increase significantly as banks purchase sovereign bonds, and anticipated stronger lending to large government projects materializes in the coming months.

—Alyssa Grzelak, Alejandro Duran Carrete, Angus Lam, Natasha McSwiggan, Pedram Moezzi, Tan Wang, Thandeka Nyathi