Tariffs and the Loan Book: Preparing for the Ripple Effects
- sknightrisk
- Feb 6
- 2 min read
There’s been no shortage of analysis on the potential fallout of a trade war between Canada and the U.S. Many experts have weighed in on how tariffs could reshape industries, disrupt supply chains, and slow economic growth. But as I’ve been reading through these reports, I keep coming back to a simple but important question: What does this mean for lending?
A recent article from Brookings provided a clear breakdown of two potential scenarios:
The U.S. imposes a 25% tariff on Canadian imports, but Canada does not retaliate.
Canada responds with equal tariffs on U.S. goods.
At first glance, the impact of a unilateral U.S. tariff is concerning but manageable—Canada’s GDP would take a hit, and some industries would feel the strain. But if Canada responds with its own tariffs, the economic shock intensifies. The consensus I am hearing among economists is that retaliation would deepen the downturn, pushing GDP lower, raising inflation, and driving up unemployment.
From a credit perspective, these factors create real risks. Unemployment and inflation are two of the biggest drivers of loan delinquencies. Higher job losses mean more borrowers struggling to meet their obligations. Rising inflation erodes purchasing power, making it harder for households and businesses to keep up with expenses. The Bank of Canada’s response would also play a crucial role—if interest rates drop to counteract economic slowdown, lenders could see thinner margins. But if rates rise to fight inflation, debt service costs would climb, putting further pressure on borrowers.
While no one can predict the future with certainty, understanding these macroeconomic shifts is critical for risk managers and lenders alike. Loan books don’t operate in isolation—they reflect the broader economic landscape. And in the face of potential trade tensions, now is the time to stress-test portfolios, assess exposure, and ensure businesses and consumers alike are prepared for whatever comes next.
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