Tariffs have returned to the centre of economic policy, but they are only one part of a broader shift towards greater trade fragmentation and geopolitical uncertainty.
For banks, the challenge is understanding how these developments could flow through customer behaviour, liquidity, funding, interest rates and FX exposures, and ultimately affect the balance sheet.
Trade shocks rarely have a single, predictable outcome. They can affect inflation and economic growth in different directions, change expectations for interest rates and currencies, and alter the behaviour of corporate and retail customers.
For bank Treasury and ALM teams, that makes forward-looking scenario analysis increasingly important.
1. Trade Shocks Can Change Liquidity Dynamics
Trade disruption starts in the real economy, but its effects can quickly reach bank balance sheets.
Businesses facing higher input costs, disrupted supply chains or weaker demand may change how they use credit facilities, manage deposits or time payments. Changes in corporate and consumer behaviour can, in turn, affect banks’ liquidity needs and funding profiles.
The impact will not be the same for every bank. It depends on factors such as customer composition, sectors served, currencies and geographic exposure. Recent analysis from the European Central Bank, for example, found that euro area banks more exposed to trade risk increased their monitoring of affected borrowers and adopted a more cautious approach to lending. [ecb.europa.eu]
For Treasury, the important question is therefore not simply whether liquidity will increase or decrease, but how different customer behaviours could affect liquidity under different scenarios.
Stress testing changes in deposit behaviour, credit utilisation and contractual cash flows can help banks understand the potential impact on liquidity buffers, survival horizons and regulatory metrics such as LCR and NSFR.
2. Funding Conditions Can Shift Quickly
Trade uncertainty can also influence market volatility, inflation expectations and risk premiums, affecting both the availability and cost of bank funding.
Tariffs may contribute to inflationary pressure, but the monetary policy response is not necessarily straightforward. Weaker growth could pull expectations in the opposite direction. Rather than assuming one rate path, Treasury teams need to consider multiple scenarios for rates, spreads and funding conditions.
These scenarios can have significant implications for the bank’s funding strategy.
Treasury teams may need to examine:
- the cost and availability of wholesale funding
- maturity concentrations
- funding diversification
- foreign-currency funding
- deposit stability
- the effect of different funding structures on projected liquidity ratios
Changes in funding composition, tenor and availability can also affect LCR and NSFR, making forward-looking liquidity and balance-sheet analysis increasingly important.
3. ALM Assumptions Need Revisiting
Trade shocks do not stop at liquidity and funding.
Changes in inflation, economic activity and monetary policy expectations can feed through to interest rates, customer behaviour and ultimately the bank’s NII and economic value.
At the same time, behavioural assumptions calibrated during more stable periods may not fully capture how customers respond when economic conditions change rapidly.
This raises practical questions for ALM teams:
What happens if corporate credit utilisation increases?
What if deposit behaviour changes?
What if inflation remains elevated while economic growth slows?
How would alternative interest-rate paths affect NII and EVE?
Instead of trying to predict one outcome, banks can use scenario analysis to understand how the balance sheet behaves across several plausible scenarios.
This is particularly important for IRRBB, where changes in rate expectations need to be considered alongside behavioural assumptions such as deposit stability, repricing behaviour and prepayments.
4. FX and Cross-Currency Funding Require Closer Attention
Trade-policy announcements can quickly affect currencies, interest-rate expectations and cross-currency funding conditions.
For banks with foreign-currency assets, liabilities, funding or derivatives, this can alter both market-risk exposures and the economics of funding and hedging.
Treasury therefore needs clear visibility into exposures across currencies, together with effective limits and mandates and the ability to assess how different FX and interest-rate scenarios could affect positions.
This becomes particularly important when liquidity and funding exposures span multiple currencies. An apparently manageable consolidated liquidity position can look very different when analysed currency by currency.
Combining FX, liquidity and interest-rate perspectives gives Treasury a more complete view of how external shocks could affect the balance sheet.
5. Better Decisions Require a Connected View
One of the biggest challenges created by trade shocks is that the effects rarely remain within a single risk category.
Changes in customer behaviour can affect liquidity. Inflation and interest-rate expectations can influence funding costs, NII and economic value. Currency movements can add another layer of exposure.
For bank Treasury and ALM teams, the challenge is therefore to assess these effects consistently rather than through isolated assumptions and disconnected models.
A shared data foundation, combined with flexible scenario analysis and timely reporting, can help teams understand how different assumptions affect liquidity, funding, interest-rate risk and overall balance-sheet performance.
This also makes it easier for Treasury, ALM, Risk and ALCO to work from a consistent view when market conditions change.
Final Word: Prepare for Multiple Outcomes
Tariffs and trade disruption do not translate into one predictable balance-sheet outcome.
Their effects can differ across inflation, economic growth, interest rates, currencies, customer behaviour and funding markets. The implications will also vary considerably depending on each bank’s balance-sheet structure and customer base.
For bank Treasury and ALM teams, the priority is therefore not to predict the next tariff announcement. It is to understand how a range of plausible scenarios could affect liquidity, funding, NII, economic value and key regulatory metrics.
Timely data, flexible assumptions and connected scenario analysis provide a stronger foundation for making Treasury and ALM decisions when external conditions change quickly.