Banks Face Funding Challenges Amid Global Tensions

Banks in the euro area might struggle to get money from markets, especially in dollars and other foreign currencies, if global tensions keep rising. This warning came from the European Systemic Risk Board (ESRB) on a Thursday. Recently, things got tense between Europe and the U. S. over President Trump's interest in Greenland. This is just one example of how geopolitical issues can affect financial markets. Looking back at past events, the ESRB found that when there's a lot of uncertainty in the world, banks find it harder to borrow money on the global market. This is because investors become more cautious and demand higher returns for taking on more risk. The ESRB report suggests that if this uncertainty continues, banks might have a tough time getting the money they need, especially in foreign currencies. The study showed that when there's uncertainty about trade policies, banks borrow about 5% less in dollars and other foreign currencies.Banks also cut back on borrowing in foreign currencies when there's more geopolitical risk and uncertainty about economic policies. They reduced borrowing by 2% and 6% respectively in these situations. The report also found that banks are more likely to tighten their lending when there's uncertainty in U. S. economic policy. This leads to a decrease in total lending by about 4. 5% and an increase in interest rates by around 90 basis points for banks that are heavily exposed to the U. S. The study also showed that sales of bank bonds and covered bonds were more stable following these shocks, while funding through asset- and mortgage-backed securities, as well as short-term debt, was more vulnerable. This situation is a reminder that banks need to be prepared for changes in the global market. They should have plans in place to deal with unexpected events and ensure they can continue to lend money to businesses and individuals.