Western European banks are well positioned to manage the growing uncertainty surrounding the United States trade policy and the associated market volatility, according to Fitch Ratings.
The agency notes that most regional banks have entered this period of weakened economic growth with increased ratings headroom, following several years of strong performance and good asset quality.
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Only around 4% of bank ratings in Western Europe are currently on Negative Outlook. However, Fitch warns that a significant deterioration in GDP growth forecasts or rising unemployment could lead to a revision of its ‘neutral’ 2025 sector outlook to ‘deteriorating’, or to negative outlooks for banks in the most affected countries.
The short-term business growth prospects of Western European banks have already weakened.
Fitch’s March Global Economic Outlook projected a modest 2025 GDP growth of 0.7% in the eurozone and 1.1% in the UK. The agency now expects further reductions in lending volumes and a potential decline in net interest margins if interest rates fall. The ability of banks to reinvest maturing securities and swaps into higher-yielding instruments may partially offset this impact, particularly if yield curves steepen.
The extent of the impact on individual banks will vary, depending on the exposure of their domestic economies to the outcome of tariff negotiations. Banks with significant global operations and trade finance activities may experience more direct effects if global trade volumes fall.
However, diversification by geography and business lines should provide some insulation. Domestically focused banks are more shielded from international trade fluctuations, but they remain vulnerable to potential rises in domestic unemployment.
Recent market volatility has supported trading revenue at banks with significant trading operations, though it has also tested operational resilience and risk management capabilities.
Fitch notes an increase in margin calls for banks involved in securities financing, potentially contributing to price volatility. While capital markets and advisory fees are likely to decline due to reduced primary market activity, higher trading income is expected to provide some offset.
Fee and commission income is also under pressure from weaker financial markets and lower assets under management. Recovery in market performance during the second quarter would be required to stabilise this revenue stream. Additionally, Fitch anticipates higher loan impairment charges, either from IFRS 9 forward-looking models or management overlays introduced in response to increased economic uncertainty.
Globally active Western European banks face further challenges due to the need to meet regulatory standards across multiple jurisdictions. Fitch highlights that post-crisis improvements in international regulatory coordination — such as central bank currency swap agreements and cross-border resolution planning — have helped banks manage capital and liquidity effectively.
A reversal of this cooperation could introduce new operational difficulties, particularly in managing foreign-exchange liquidity and capital efficiency across borders.
