ECB's Claudia Buch Warns Tariffs and Geopolitics Pose Long-Term Risks

Claudia Buch, Chair of the Supervisory Board of the European Central Bank (ECB), issued a clear warning to markets and financial institutions: rising tariffs and geopolitical tensions are rapidly reshaping the operating landscape for banks.

Speaking before the European Parliament’s Committee on Economic and Monetary Affairs, Buch noted that while market reactions to the latest tariff announcements have been short-lived, the underlying signals point to increasing medium- and long-term risks.

“The initial market reaction was relatively brief. Activity in financial markets increased, leading to higher volatility and margin calls,” Buch said. “Bank funding spreads temporarily widened, though they remain well below historic highs. While the financial system has shown resilience so far, we are closely monitoring possible spillovers from non-bank financial intermediaries to banks—especially given the current high degree of geopolitical uncertainty.”

Buch expressed particular concern about the structural impact of tariffs on the real economy. “The long-term implications of higher tariffs for banks’ balance sheets will become apparent over time,” she explained. “Tariffs dampen trade and can negatively affect growth and corporate financial health. There is considerable uncertainty about how these effects will unfold. While it’s too early to predict asset quality deterioration, credit risk and provisioning needs may rise.”

As a result, banks must ensure they hold sufficient buffers to withstand adverse developments. The upcoming EU stress test will assess banks’ resilience under a common adverse scenario that includes geopolitical tensions and rising tariffs, focusing on the effects of a deteriorating macroeconomic environment. Banks will also be expected to evaluate clients’ exposure to higher tariffs and more fragile global value chains.

“Overall,” Buch stated, “the European banking sector remains well-capitalized and liquid.” However, she warned that “pockets of vulnerability persist,” particularly in the commercial real estate loan segment. A slow erosion in credit quality could undermine profitability if the macroeconomic outlook worsens.