The recent announcement of a new set of tariffs by the U.S. Administration in April 2025 has resulted in increased volatility across financial markets and raised concerns about economic stability globally.

The immediate aftermath saw a significant sell-off in financial markets, with significant losses in equity valuations and a tightening of financial conditions.

Although markets have somewhat stabilized following a temporary pause in tariff implementations, the long-term impacts of these policy shifts are still uncertain.

Financial market conditions deteriorated sharply as the possibility of an economic slowdown became evident.

The volatility triggered a reassessment of risk premiums, leading many market participants to adopt more cautious positions.

Despite some recovery in asset prices after the announcement of a 90-day tariff pause, concerns linger about the sustainability of this rebound, particularly given the already stretched market valuations observed prior to the turmoil.

The euro area, characterized by its integration in global supply chains, remains especially vulnerable to disruptions from these trade tensions.

Companies reliant on foreign trade are facing immediate challenges including rising costs and decreased revenues, which could subsequently affect the overall credit quality across the region’s financial institutions.

With government finances already strained due to heightened defense spending, a slowdown in economic growth could further complicate fiscal stability in various euro area member states.

The current edition of the Financial Stability Review highlights three critical areas of concern: the risks stemming from the increasing interconnectedness of the crypto market with traditional finance; the pressures arising from ongoing trade tensions; and the long-term implications of an ageing population for financial stability across both financial and non-financial sectors.

This review aims to enhance awareness of systemic risks to promote more informed decision-making among policymakers and the financial sector.

In recent months, the heightened geopolitical and policy uncertainty has accelerated, overshadowing prior improvements in political stability within euro area countries.

The unpredictability surrounding U.S. policies has compounded existing uncertainties related to trade and regulation, raising fears of broader geoeconomic fragmentation.

Market volatility surged following the U.S. tariff announcements, leading to widespread declines in risk assets reminiscent of earlier market disruptions during the COVID-19 pandemic.

Although a recovery took place after the tariff pause was enacted, the market dynamics appear altered, raising the possibility of future volatility, especially linked to geopolitical tensions and economic forecasts.

Given the current market environment, the vulnerabilities within non-bank financial intermediaries (NBFIs) have drawn increased scrutiny.

Several non-bank entities are facing liquidity pressures amidst declining asset values, particularly those with heavy concentration in U.S. dollar assets.

The financial stability outlook remains at risk due to a combination of high asset valuations and declining liquidity, leaving markets susceptible to sharp corrections.

Real estate markets, while starting to exhibit some recovery signs, continue to grapple with issues including overvaluation and structural shifts in demand.

The commercial real estate sector is specifically facing challenges from a decrease in demand for office spaces and a rising number of vacancies, attributed to changing work patterns post-pandemic.

Ultimately, the interplay between economic uncertainties, rising funding costs, and weaker growth forecasts may impose further strain on the balance sheets of euro area firms and households, potentially leading to increased credit risks for banks and non-bank financial institutions alike.

These developments underscore the significance of comprehensive policy responses aimed at enhancing the resilience and stability of the financial system in the face of ongoing external shocks.