Banks Face Funding Challenges Amid Global Tensions
European Systemic Risk Board (ESRB) warns of potential difficulties in accessing market funds, particularly in foreign currencies, as geopolitical tensions escalate.
Geopolitical Tensions Impact Financial Markets
Recent tensions between Europe and the U. S. over President Trump's interest in Greenland highlight how geopolitical issues can influence financial markets.
Historical Context and Findings
The ESRB report reveals that during periods of high global uncertainty, banks face increased difficulty in borrowing money from global markets. Investors become more cautious and demand higher returns to offset the added risk.
Impact of Trade Policy Uncertainty
- Banks borrow approximately 5% less in dollars and other foreign currencies when there is uncertainty about trade policies.
Geopolitical Risk and Economic Policy Uncertainty
- Banks reduce borrowing by 2% and 6% respectively in these scenarios.
U. S. Economic Policy Uncertainty
- Banks heavily exposed to the U. S. experience a 4.5% decrease in total lending.
- Interest rates increase by around 90 basis points.
Stability of Bank Bonds and Covered Bonds
- Sales of bank bonds and covered bonds remain relatively stable following market shocks.
- Funding through asset- and mortgage-backed securities, as well as short-term debt, is more vulnerable.
Preparedness and Planning
The situation underscores the importance of banks being prepared for global market changes. They should have contingency plans to manage unexpected events and ensure continued lending to businesses and individuals.
