The European Central Bank published a special feature in its Financial Stability Review on how rising trade tensions and trade policy uncertainty could transmit to euro area financial stability. It concludes that uncertainty and the implementation of trade restrictions can depress economic activity, trigger asset-price repricing and, through both market and balance-sheet channels, weaken banks’ funding conditions, asset quality, profitability and lending. Model-based evidence shows that a 1 standard deviation increase in trade policy uncertainty lowers the median real GDP forecast by 0.15 percentage points after four quarters and the 10th percentile by 0.75 percentage points, while increasing financial vulnerabilities (as captured by the systemic risk indicator) with only limited repercussions for systemic stress (as measured by the composite indicator of systemic stress). Bank-level analysis links the same shock to a 1.9% fall in euro area bank stock prices on impact and 10.4% after six months, alongside wider funding spreads (credit default swap spreads up 12 basis points and bond spreads up 7 basis points after six months), higher provisioning needs and weaker profitability and credit (cost of risk up 11 basis points after one year, return on assets down 8 basis points after one year, and lending down 1.9% after one year). Exposures to EU sectors reliant on US goods trade account for 9.6% of total non-financial corporate exposures (1.5% of total assets), and the accompanying equity analysis highlights broad-based repricing after tariff announcements, with several euro area sectors appearing particularly sensitive. The feature highlights capital and liquidity buffers as the first line of defence, and calls for regular risk assessments, portfolio diversification, and stress testing and scenario analysis to gauge and prepare for trade-related shocks.
European Central Bank 2025-05-20
European Central Bank research links trade policy uncertainty to a 10.4% drop in euro area bank stock prices and weaker lending
The European Central Bank's Financial Stability Review examines the impact of rising trade tensions and policy uncertainty on euro area financial stability, highlighting potential economic activity depression and asset-price repricing. A 1 standard deviation increase in trade policy uncertainty could lower real GDP forecasts and increase financial vulnerabilities, significantly impacting bank stock prices, funding spreads, and profitability. The report emphasizes the importance of capital and liquidity buffers, regular risk assessments, and stress testing to mitigate trade-related shocks.