The tariff wars: What’s the impact on corporate and investment banking risk management?

In the past few weeks, we’ve seen a resurgence of the tariff wars. The shift in US trade policy has significantly altered the global economic landscape. These protectionist measures are designed to bolster domestic US industries; however, the ripple effects extend far beyond the immediate targets. They impact supply chains, market volatility, and international relations. For banking, the implications are profound, requiring a recalibration of risk management strategies to navigate heightened uncertainties.

The core of corporate and investment banking (CIB) risk management is the ability to anticipate and mitigate risks stemming from macroeconomic shifts. The current tariff war causes price fluctuations, supply chain disruptions, and volatility. This translates into increased market risk. Equity markets react sharply, and fixed income markets face similar pressures as bond yields fluctuate in response. Currency is also affected with imbalances in trade flow.

It is now up to the risk management function to factor in these uncertainties alongside traditional economic indicators. Scenario analysis has become more complex with models needing to account for sudden policy changes, retaliatory measures from governments, and the secondary effects on supply chains. So let’s break it down:

Credit risk

Credit risk is heightened, particularly among corporate clients with significant exposure to international trade. Firms that are reliant on global supply chains face increased costs, reduced margins, and in some cases, disrupted operations. This is especially true for the manufacturing, technology, and agriculture sectors – often at the centre of tariff disputes.

For risk management, this means the reassessment of credit exposures. Models that rely heavily on historic data may not be capturing the rapidly evolving landscape. Therefore, CIBs may need to adopt more dynamic risk assessment frameworks, incorporating real-time data, industry-specific stress tests, and forward-looking indicators. Additionally, a greater emphasis on supply chain risk analysis within credit assessments is required – diving deeper into clients’ operational dependencies.

Operational risk

As trade regulation is in flux, rapid adjustment in compliance, legal frameworks, and reporting are required. Banks must ensure that their teams are agile enough to adapt to new tariffs. Additionally, increased reliance on data analytics and technology to manage these risks brings its own set of challenges. Systems need to be robust to process large volumes of data from various sources. The risk of cyber threats can also escalate, especially in the face of geopolitical tensions.

Strategic risk

Repositioning product offerings, advisory services, and geographic focus may be key here. For example:

• Hedging instruments may be needed to manage currency and commodity risks for product offerings.
• Businesses may need more nuanced guidance on geopolitical risk to navigate the complexities of international trade.

Banks with significant exposure to affected regions or industries must evaluate the sustainability of their business models. Here, diversification is key to mitigating the long-term risks.

Liquidity risk

Heightened uncertainty often leads to risk aversion among investors, tightening credit conditions and increasing funding costs. Risk management teams would need to adapt by enhancing their liquidity monitoring frameworks, incorporating stress scenarios that account for sudden market dislocations. This includes the potential for capital flight from emerging markets, disruptions in interbank lending, and shifts in investor sentiment that could impact funding availability.

The cost of capital may rise, too, as investors demand higher risk premiums. This would directly impact pricing strategies, capital allocations, and profitability.

Regulatory and compliance risk

Governments may implement new controls, reporting requirements, and compliance obligations as a result of changing trade strategies. This may become crucial in order to avoid the legal and regulatory penalties. Coordination between risk management, legal, and compliance is required to ensure all operations are aligned. This also means more dialogue with regulators.

Moreover, the extraterritorial reach of some regulations (US sanction laws for example) adds another layer of complexity. Balancing domestic laws and international relations is key here.

Conclusion

The current tariff wars underscore the interconnectedness of economic, political, and financial risks in today’s operating landscape. For CIBs, the environment demands a more holistic and agile approach to risk management. Traditional models and frameworks must continue to evolve and incorporate real-time data, dynamic scenario analysis, and a deeper understanding of geopolitical factors.

Ultimately, the ability to manage these risks effectively will be a key differentiator for CIBs, influencing not only their financial performance, but also their reputation, client relationships, and long-term strategic positioning. As the global economy continues to grapple with the new era of protectionism, CIB risk leaders must be at the forefront, guiding their institutions through the complexities of this new period in history.

That said, it’s important to view this analysis as an overview of potential worst-case scenarios. While the risks are real, the situation may not unfold as severely. Many of these dynamics are driven by geopolitical strategy rather than purely economic factors, and history has shown that trade tensions often lead to negotiations rather than prolonged conflict. Markets can adjust, supply chains can adapt, and policy shifts can quickly change the risk landscape. For now, the sensible approach is to remain vigilant, adaptable, and prepared – while recognising that the full impact will become clearer as events evolve.

Afif Fakhreddine is an editor for RiskMinds International and QuantMinds International. Save the date!