Trade War Not All Bad News for Euro Area Banks - At First

This commentary discusses the ways in which tariff barriers between the EU and the U.S. could affect banks operating in the Euro area.

-- The near-term inflationary effects of tariffs and additional EU fiscal stimulus could slow or pause the downward path of interest rates, supporting bank interest income.
-- Weaker economic growth from a tariff war could eventually weigh on asset quality.
-- Nonetheless, banks confront the challenging environment with strong profitability and capital positions.

"At least initially, tariffs could raise prices and slow or pause the downward path of interest rates. This in isolation would be supportive of bank interest income," said Jason Graffam, Senior Vice President of Global Sovereign & Financial Institution Ratings. "But the longer a trade war endures, the greater the drag on economic activity and the concern for bank asset quality. Banks in Europe for the most part can confront the challenging environment on solid footing, with strong profitability and capital levels."