Caution flags waving for bankers facing tariffs unknowns

As conversations revolving around tariffs continue to develop, the banking community is expected to become more cautious when it comes to lending.

“Banks are going to be impacted basically from the risk in the economy,” said Dr. Manuel Lasaga, a clinical professor in the Department of Finance at Florida International University’s College of Business and president of Strategic Information Analysis, an economics and finance consulting firm, “because there’s going to be a higher level of risk associated with the impacts of the tariffs, the impact on inflation, the impact on purchasing power that has on consumers. I would think, as it stands now, that we could be slipping into a recession before the end of this year.”

For banks, he said, it represents a significant risk on their asset side, “in other words, their loans, their loan portfolios, the possibility that there could be an increase in the number of problem loans, defaults of loans. In times like these, I think they’re likely to be more cautious. They have to be more cautious in their lending.”

At this point, said Dr. Lasaga, the situation involving tariffs is highly uncertain because the president announced the imposition of the tariffs.

“Basically what he [President Donald Trump] stated in his order,” said Dr. Lasaga, “was that every country – we’re talking about, let’s say, 182 countries around the world – would pay a tariff rate of 10% starting on April 5…. In other words, 10% means that whatever the countries around the world were paying in tariff rates, there was going to be a 10% across the board.”

The types of goods were not specified, he said. Additionally, from all the countries, 57 were chosen and are “to face a significantly higher percentage actually…. The tariff is referred to as the reciprocal tariff, because the magnitude of that increase – the reciprocal tariff – represents how they are viewed in the US, as how not so fair are their trade practices.”

However, he said, on April 9 the president said the reciprocal tariffs would be put on hold.

Dr. Lasaga said it would be logical to think the president may significantly reduce the tariffs and wanted to start at a high rate and then see how far down it would be brought.

However, the retaliation would be “our trading partners would not be so much a partner anymore,” he said. “They are going to also impose tariffs.

That impacts us in another way, negatively, which is then US exporters, particularly US producers of goods, are going to see a decline in the demand for US exports, because the countries that put their retaliation in tariffs against US exports. In other words, in the euro area, for instance, if they end up imposing their retaliatory tariffs, then we’re going to see a drop in exports from the US to the euro area and of the other countries that impose the retaliation.”

At that point, said Dr. Lasaga, this will result in an increase in unemployment because of fewer exports. The inflation this results in will also reduce purchasing power of US consumers, he said. It is “very likely we’ll have a recession.”

Countries use tariffs to build barriers, he said. The reason for the barriers on imports is because they would like such goods to be produced in their home country, because it generates employment.

“Tariffs have always been used as a policy,” he said. “First, of course, as a way of raising revenues for the government, because it is a tariff. It’s a tax on imports. But the other one, from an economic development perspective initiative on the part of different countries, is that over the years, I’ve seen countries raise the tariffs to help their domestic industry, whether it be the automotive industry, the apparel industry, different types of industries by making imports much more expensive.”

As the situation stands today, said Dr. Lasaga, a recession is likely before year’s end. The primary risk to banks is going to be on the lending side, the inflation and their liquidity.

“Times when there’s a greater risk in the economy,” he said, “they should have more liquidity. Liquidity means that as depositors, because the economy, let’s say, is going into a recession, depositors might need to basically withdraw greater deposits than they may have normally because of the effects of inflation, and so banks also have to have plenty of liquidity to be able to manage situations, if that happens also as well.”

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