How US Tariffs are Raising Risks for European Banks

Geopolitical tensions are reshaping global trade, and new US tariffs are creating fresh uncertainty for Europe’s export-heavy economies. European banks do not have direct tariff exposure, but the pressures facing manufacturers, small and midsize enterprises (SMEs), and leveraged borrowers can move quickly into credit portfolios. These risks are rising at a time when the credit cycle is already showing signs of strain. 

The full European Banks report provides financial advisors with essential insights into how tariffs interact with current credit conditions, sector exposures, and the growing stress points visible in the European banking system. Download the free analysis.  

Trade patterns between the European Union and the United States point to additional pressure. Exports to the US rose early in the year but fell sharply in August as importers worked through inventories that were frontloaded before tariffs took effect. Reciprocal tariffs were announced in April and delayed until August, creating months of uncertainty for exporters. Key industries, including pharmaceuticals, still lack clarity on tariff treatment. While the full impact will unfold gradually, the combination of margin compression and shifting export volumes suggests that pressure will build as new trade rules take hold. 

Sector exposure further complicates the credit outlook. Lending to autos, machinery, chemicals, and agriculture accounts for a significant share of commercial credit in several European economies. These sectors rely on cross-border supply chains and global pricing power, and are among the most vulnerable to tariff-related disruptions. Sector charts show meaningful changes in export volumes and pricing that could translate into credit risk as conditions tighten. 

Export expectations remain fragile. Survey data show temporary improvements in sentiment but no sustained trend, underscoring the caution among trade-dependent borrowers.

European banks enter this period with solid capital and liquidity levels. Several years of elevated net interest income have strengthened balance sheets, and diversified loan books provide some protection against localized weakness. Even so, certain vulnerabilities are becoming more visible.  

Diversification remains a key buffer. Large banks spread lending across regions and industries, which reduces the impact of stress in any single export-exposed sector. 

Provisioning levels, however, remain below midcycle norms. Credit costs have not fully normalized from historically low levels, and rising Stage 2 Loans suggest that some borrowers are showing early signs of strain.  

Under International Financial Reporting Standards (IFRS) 9, banks classify loans into three categories: Stage 1, which includes performing loans with no evidence of credit deterioration; Stage 2, where credit risk has increased but the borrower is not yet impaired; and Stage 3, which encompasses impaired or close-to-default loans. An uptick in Stage 2 balances indicates weakening borrower fundamentals and may require higher reserves as conditions become more volatile. 

Syndication continues to help banks distribute corporate exposures, but it comes with risks. During periods of market stress, underwriting pipelines can become vulnerable to execution challenges, increasing the likelihood of hung deals. 

The rise in Stage 2 loans reinforces the importance of early monitoring. These watchlist exposures remain performing, but they represent the first signal of deteriorating credit quality and warrant sustained attention. 

Several structural challenges shape how tariff-related stress could affect banks: 

Delayed default signals from covenant-lite lending. Covenant-lite structures are common in European leveraged finance. These deals reduce the frequency of early warning triggers and limit banks’ visibility into emerging borrower stress until conditions have already deteriorated.  

Private-market exposures that magnify downturns. Banks provide funding across private markets, including revolving credit facilities, warehouse lines, subscription lines, and NAV loans. These exposures can amplify stress, particularly when liquidity tightens.  

Artificially low credit costs. Credit costs remain below midcycle norms. A move toward normal provisioning would lower bank earnings, and a downturn linked to tariff pressure would intensify the impact. 

EBA stress test findings. Under the European Banking Authority’s stress test adverse scenario, nearly all major European banks (excluding UK and Swiss names) take a sharp hit: a combined loss before tax in year one, followed by profits well below baseline for the next two years. The main culprit? Surging credit costs, which drive most of the deterioration. 

Overall, the challenge is not tariffs alone. It is the way tariffs interact with existing late-cycle dynamics across the credit market. 

Economies with high exposure to export-sensitive sectors. Banks operating in countries with large manufacturing bases face more significant indirect tariff risk. The industries most exposed include autos, machinery, chemicals, and agriculture.   

Regions with high corporate and SME lending concentrations. Some European countries maintain higher shares of corporate and SME lending relative to retail. SMEs typically have weaker balance sheets and are more vulnerable to export disruptions and cost pressures. Banks concentrated in these regions face greater tariff-related credit risk. 

Banks with leveraged-lending exposure. Covenant-lite structures, concentrated borrower profiles, and dependence on private-market liquidity can increase loss severity when conditions deteriorate. Banks active in underwriting or distributing leveraged loans face heightened sensitivity to volatility and execution risk in syndication pipelines. 

Institutions with material US footprints. Some European banks maintain significant US operations, particularly in corporate and wealth management. These institutions would be more directly influenced by changes in US economic conditions. 

The greatest tariff sensitivity appears in regions and institutions where export concentrations, corporate and SME lending, and leveraged finance intersect. 

• Valuations are elevated. European banks are trading near their highest multiples since the global financial crisis, which reduces the margin of safety if a macro or credit shock occurs.

• Credit costs are likely to rise. Provisioning remains below mid-cycle levels. Even a modest return to normal would pressure earnings, and a downturn would magnify the effect.

• Trade-linked sectors warrant close monitoring. Autos, machinery, chemicals, and agriculture remain the most sensitive to tariff-related disruptions.

• Leveraged lending is a key transmission channel. Private-market exposures and covenant-lite structures can amplify stress across the system.

• Early-warning signals are increasing. Rising Stage 2 loans point to underlying weakness that may not yet be evident in headline performance.

For financial advisors and asset managers, the message is clear. Monitor sector exposures, track early credit-quality indicators, and evaluate whether current valuations adequately compensate for rising geopolitical and macroeconomic risks. These pressures may build gradually, but their effects can accumulate quickly across SME, corporate, and leveraged-lending portfolios.  

The Direct Advisory Suite helps advisors manage risk proactively and maintain resilient portfolios as late-cycle conditions develop. Try a demo today to: 

• Use holdings-level data to identify concentrations in trade-sensitive sectors. 

• Leverage research, fair value metrics, and comparative analytics to evaluate whether current pricing compensates for rising uncertainty.

• Apply reporting and proposal tools to clearly communicate how evolving trade conditions influence portfolio positioning.