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Risks to euro area financial stability from trade tensions

Author

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

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

Suggested Citation

  • Avril, Pauline & Bochmann, Paul & Domenech Palacios, Mar & Fahr, Stephan & Grothe, Magdalena & Horan, Aoife & McQuade, Peter & Pancaro, Cosimo & Pizzeghello, Riccardo & Ricci, Martino & Simon, Josep M, 2025. "Risks to euro area financial stability from trade tensions," Financial Stability Review, European Central Bank, vol. 1.
    • Handle: RePEc:ecb:fsrart:2025:0001:2
    Note: 2285252
    as

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    File URL: https://www.ecb.europa.eu//press/financial-stability-publications/fsr/special/html/ecb.fsrart202505_02~4603d3e42a.en.html
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    More about this item

    Keywords

    banks; financial stability; geopolitical risk; trade; trade policy uncertainty;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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