Risks to euro area financial stability from trade tensions

Pauline Avril, Paul Bochmann, Mar Domenech Palacios, Stephan Fahr, Magdalena Grothe, Aoife Horan, Peter McQuade, Cosimo Pancaro, Riccardo Pizzeghello, Martino Ricci and Josep Maria Vendrell Simon

Financial Stability Review, 2025, vol. 1

Abstract: Trade tensions can be a threat to financial stability, with both the implementation of trade restrictions and trade policy uncertainty resulting in adverse consequences. In this special feature, we show that trade policy uncertainty can adversely affect the real economy as well as banks’ funding, asset quality, profitability and lending. Policy authorities need to identify risks stemming from trade tensions, monitor their transmission and evaluate their potential impact on financial stability. Sound capital and liquidity buffers are financial institutions’ first line of defence to absorb shocks stemming from trade disruptions. However, banks should also conduct regular assessments to identify and evaluate these specific risks. In addition, they should diversify portfolios to minimise their exposure to such risks. A box within the special feature analyses the risks of euro area equities repricing across sectors in response to developments in the United States, with a particular focus on news relating to trade policy. JEL Classification: E44, F13, G18, G21

Keywords: banks; financial stability; geopolitical risk; trade; trade policy uncertainty (search for similar items in EconPapers)
Date: 2025-05
Note: 2285252
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