European Banks Brace for Tariff Storm

The European banking sector is reeling from the latest round of tariffs imposed by U.S. President Donald Trump, with shares in major lenders plummeting as fears of a global recession mount. The tariffs, which include a blanket 10% levy on all trade partners and additional reciprocal duties on targeted countries, have sent shockwaves through financial markets, with European banks bearing the brunt of the impact.

On April 7, 2025, shares in German lenders Commerzbank and deutsche bank were down between 9.5% and 10.3% in early Frankfurt trade, following a 5.4% and 9.8% decline on Friday. The selloff was not limited to Germany; Switzerland's ubs was down 3.6% in pre-market trade, and an index of Japanese bank stocks plunged as much as 17%. HSBC's Hong Kong shares plunged 14.7%, reflecting the global nature of the market turmoil.

The European banking index extended its losses on Friday morning with a further 9.28% in losses by 12:42 p.m. London time, as giants such as UniCredit each surrendered between 9% and 11% of their share price. In Switzerland, shares of continental Europe's largest bank UBS were down 8%. The lenders are weathering the storm of a dual-pronged attack linked to their significant U.S. exposure and diminished prospects for the European economy.



Economists have warned that the duties announced Wednesday could bleed into higher costs for American consumers, fueling domestic inflation and stoking the risk of a recession. Allianz Chief Economic Advisor Mohamed El-Erian told CNBC's Silvia Amaro on the sidelines of the Ambrosetti Forum in Cernobbio, Italy, "I don't think [a U.S. recession] is inevitable because the structure of the economy is so strong, but the risk has become uncomfortably high."

Recessions typically translate into declining interest rates that ripple into net interest margin contraction for the financial sector, also reducing loan demand and bolstering the odds of defaults. European banks — which have already been battling this conundrum since the European Central Bank began cutting rates in June last year — have been forced to pivot from the traditional focus on pure lending to fee-yielding services such as investment banking and asset management.

Beyond reacting to high uncertainty in the prominent U.S. economy, European — and broader global — financial institutions are also vulnerable to disruptions and volatility in the dollar, given their substantial reserves of the world's dominant currency. They are also impacted by the prospect of stifled European economic growth, as trade tariffs endanger demand for goods from Europe. Within the EU, which will be subject to a 20% levy, Poland on Thursday warned that the U.S. protectionist trade policies will cost the Polish economy 0.4% of its gross domestic product, or roughly 10 billion zlotys ($2.6 billion).

Deutsche Bank warned that the euro area's gross domestic product could suffer a hit of 0.4-0.8 percentage points in the wake of the U.S. tariffs, larger than the hit expected in the lender's 2025-2026 forecast. The EU's executive arm, the European Commission, is working on a package of short-term economic proposals to support the region's economy amid U.S. tariffs, Bloomberg News reported April 2 — with EU chief Ursula von der Leyen so far only saying that the bloc is "preparing for further countermeasures, to protect our interests and our businesses if negotiations fail."

Bank of America Global Research strategists warned of significant downside for the banking sector in the wake of the tariffs, noting lenders have so far been "helped by a strong bottom-up narrative and German fiscal hopes, and are, hence, among the assets least advanced in pricing global macro trouble."

In summary, the recent tariffs imposed by U.S. President Donald Trump have had a significant negative impact on the European banking sector, leading to substantial losses in share prices and raising concerns about financial stability and profitability. The potential long-term effects include declining interest rates, reduced loan demand, increased defaults, and vulnerability to disruptions and volatility in the dollar. European banks are also impacted by the prospect of stifled European economic growth, as trade tariffs endanger demand for goods from Europe. The EU is working on short-term economic proposals to support the region's economy amid U.S. tariffs, but the long-term effects on the European banking sector remain uncertain.

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