Reading, UK – JULY 5, 2021: British High Street Banks stopping account holders buying using or processing crypto related transactions as traditional banking industry declares war on crypto currencies
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European banks have been battered in the wake of U.S. President Donald Trump’s sweeping and more-aggressive-than-anticipated tariffs.
The European banking index extended its hemorrhage on Friday morning with a further 9.28% in losses by 12:42 p.m. London time, as giants Deutsche Bank, Intesa Sanpaolo, Banco Santander and UniCredit each surrendered between 9% and 11% of their share price.
In Switzerland, which faces a U.S. tariff of at least 31% under the latest measures, 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 — involving a blanket 10% tariff on all trade partners and further reciprocal levies on targeted counterparts — could bleed into higher costs for American consumers, fueling domestic inflation and stoking the risk of a recession — which Allianz Chief Economic Advisor Mohamed El-Erian warns has now grown uncomfortably high.
“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,” he told CNBC’s Silvia Amaro on the sidelines of the Ambrosetti Forum in Cernobbio, Italy.
Meanwhile, Morningstar’s Suryansh Sharma warned on April 3: “Economic slowdowns (or recessions) have a materially adverse impact on the U.S. banking industry’s loan growth, credit costs, investment banking fees, trading profitability, and asset management fees.”
Critically, 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).
In a Thursday note, 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.”
European banks, particularly Germany-based lenders, had joined regional defense companies in gaining ground in recent weeks after the European Union and its largest economy took steps to relax their debt rules to spur on security spending, raising prospects of a boost to regional loan activity.