Key Points
- Europe’s top financial risk watchdog, the ESRB, is warning of a potential funding squeeze for European banks.
- The current geopolitical uncertainty, including the U.S.-EU dispute over Greenland, heightens the risk.
- Geopolitical shocks tend to make it more expensive for banks to borrow, especially in U.S. dollars.
- A “sustained period of uncertainty” could test the banks’ ability to fund themselves.
Europe’s top financial risk watchdog is warning that the continent’s banks could find it harder to get the funding they need if the current high level of geopolitical uncertainty continues. The European Systemic Risk Board (ESRB) said in a new report that banks are particularly vulnerable to borrowing in U.S. dollars and other foreign currencies.
The warning comes at a tense moment, with a new trade dispute brewing between the U.S. and Europe over President Trump’s ambitions to take over Greenland.
Looking at historical data, the ESRB found that geopolitical shocks tend to make it more expensive for banks to borrow on the wholesale market. When things get stressful, investors who buy bank bonds and other financial instruments become more risk-averse and demand higher returns.
The study found that a shock related to trade policy uncertainty typically leads to a 5 percentage point drop in wholesale funding in U.S. dollars. Banks also tend to tighten lending when U.S. economic policy becomes more uncertain, leading to a decline of about 4.5% in total lending.
The ESRB is worried that a “sustained period of uncertainty may test the limits” of the banks’ ability to raise the money they need to operate. This could have a ripple effect on the broader economy, as a credit crunch at the banks would mean less money available for businesses and consumers to borrow.
The report highlights just how interconnected the global financial system is, and how quickly a political dispute on one side of the Atlantic can create financial problems on the other.
