U.S. banks vulnerable to trade disruptions, study quantifies impact
A new Federal Reserve study quantifies the exposure of large U.S. banks to foreign trade disruptions. It shows that banks with greater exposure experienced larger stock price declines after April 2025 tariff announcements.
Mapping trade risk exposure
Researchers developed a market-based measure to assess firms' and industries' vulnerability to foreign trade disruptions.
This innovative approach, integrated with detailed supervisory data, allowed for the precise quantification of large U.S. banks' specific exposure to such events.
The study introduces a novel bank-level vulnerability index, designed to systematically track and evaluate the potential impact of global trade shifts on individual financial institutions.
This index provides a granular view of how trade-related risks propagate through the banking sector, offering a new analytical tool for risk assessment and supervisory oversight.
It highlights the interconnectedness of global commerce and domestic financial stability.
Tariff shocks and bank returns
The study demonstrates a clear link between higher bank exposure to trade disruptions and adverse financial outcomes.
Following the April 2025 tariff announcements, banks identified with greater exposure experienced significantly larger declines in their stock prices.
The newly developed vulnerability index proved highly effective in explaining these market reactions, accounting for 18 percent of the cross-sectional variation in bank returns during that specific period.
This finding underscores the critical importance of understanding and monitoring trade-related risks for maintaining overall financial stability within the U.S. banking system.
Timely warning for regulators
The study provides a timely, data-driven framework for assessing a growing risk to the financial system.
Its quantification of bank vulnerability offers a concrete tool for supervisors to integrate trade-related exposures into their risk assessments.
However, the findings highlight an ongoing challenge for financial stability in an increasingly interconnected global economy.