21 May 2025

• Shifts in global trade policy lead to sharp increase in uncertainty, causing large spikes in financial market volatility
• Stretched valuations and low non-bank liquidity buffers leave financial markets vulnerable to further shocks
• Escalating trade tensions could adversely affect euro area firms and households, entailing credit risk for banks and non-banks
• Government finances may be negatively impacted by increased defence spending, although boost to growth cannot be excluded

A marked spike in uncertainty across global trade, defence, international cooperation and regulation policies could prove challenging for financial stability, according to the May 2025 Financial Stability Review, published today by the European Central Bank (ECB). Frequent shifts and reversals in tariff policy, alongside significant changes in the geopolitical environment, could have major economic and financial impacts. While global macroeconomic imbalances remain a long-standing issue in the policy…