Europe | Impact of the tariff war on banking: moderate and manageable

Summary

Tariff wars and shocks to international trade can significantly affect economic activity and the performance of banking systems.

Key points

• Key points:
• The main impact occurs indirectly, stemming from a potential economic slowdown that reduces banks’ ability to generate business and borrowers’ ability to repay their debts, affecting credit quality and profitability in turn.
• A rise in NPLs is likely, which would increase risk-weighted assets (RWAs) and, as a result, could erode the solvency of banks.
• In addition, there could be a move towards safe assets ("flight to quality") due to greater uncertainty, and there will be changes in banks' financing conditions, depending on whether monetary policy raises interest rates (to combat inflation) or lowers them (due to the economic slowdown).
• Recent studies have identified which European banking systems are most and least exposed to the trade war. Italy is considered the most exposed via the Bank of Italy due to its exports to the United States and the composition of its credit portfolio, more concentrated in sectors affected by tariffs.
• Germany, Ireland and Slovenia have also been identified as vulnerable. Moody's agrees in identifying Ireland, Germany and Italy as the most exposed, also suggesting that the banking systems of Spain, Italy and the United Kingdom could see their net interest margins (NIM) reduced due to the high proportion of variable-rate mortgages.

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