Tariff volatility is a core driver of credit risk, liquidity pressure, and portfolio uncertainty. What began as a question of how tariffs would impact borrower costs has evolved into something far more complex. Today, banks are dealing with an environment shaped by margin compression, shifting supply chains, and the growing but highly uncertain prospect of tariff refunds.

There is no single issue to solve. Instead, institutions are facing a cluster of interrelated risks, many of which are still developing in real time:

• Borrowers are projecting cash flows that may depend on refunds that have no defined timeline 
• Margins are under pressure from tariffs that may continue to evolve 
• Covenant performance is increasingly influenced by assumptions that may not hold 
• Portfolio exposure is uneven and often not fully visible 

Trying to track every moving part can quickly become overwhelming, so the more effective approach is to focus on what matters most right now. Based on what we are seeing across the market, there are five critical areas that mid-tier banks should prioritize immediately to position themselves for what comes next.

Refunds are not liquidity, at least not yet

Much of the current conversation is centered on tariff refunds. In many cases, these amounts are meaningful and could materially improve borrower liquidity. But the pathway to realizing those funds remains unclear. There is no single defined process. Refunds may be issued automatically, require detailed filings, or in some cases, depend on litigation. Each path introduces a different level of timing risk, execution complexity, and uncertainty around final recovery. Despite this, some borrowers are already incorporating refunds into forward-looking financial assumptions occasionally positioning them as near-term sources of repayment.

From a credit standpoint, the distinction is critical: a projected refund is not the same as accessible liquidity. Until the process is defined and the outcome is reasonably certain, treating it as cash introduces distortion into underwriting and monitoring. The more disciplined approach is to evaluate borrower strength based on core operations alone, layering in any refund benefit only once there is a credible and validated path to realization.

Margin pressure is the signal banks should be watching

While refund uncertainty is drawing attention, the more immediate – and more reliable –  indicator of risk remains margin compression.

Tariffs impact borrowers unevenly. Some organizations have successfully passed through costs; others are absorbing them, and many are relying on partial concessions from suppliers. At the same time, the tariffs continue to shift, creating the possibility of additional pressure without offsetting relief. This creates a growing disconnect between reported financial performance and what may ultimately prove sustainable.

Currently, revenue alone is no longer a sufficient indicator of stability. When margin degradation appears alongside projections that depend on uncertain refunds, it often signals a deeper issue: future liquidity stress that has not yet surfaced in cash flow.

Covenant performance is becoming less reliable

Tariff-related assumptions are also beginning to influence covenant calculations, often in subtle but important ways. Refund expectations may be included in EBITDA adjustments. Forward projections may assume cost recovery that has not yet occurred. In many cases, loan documentation does not clearly address how these types of inputs should be treated, leaving room for interpretation.

If covenant performance depends on variables that are not yet defined – such as timing of refund timing, income classification, and claim realization – then the covenant itself becomes a less effective early warning tool.

Banks should step back to reassess how these inputs are treated, test performance under scenarios that exclude refund assumptions, and establish alignment across credit, legal, and risk teams. Without that consistency, early indicators of deterioration can be obscured.

The real risk may be hidden at the portfolio level

Another challenge is that tariff exposure is rarely uniform. It varies widely depending on industry, supply chain structure, and a borrower’s ability to adjust sourcing or pricing. Yet many institutions continue to evaluate this risk at the individual borrower level, rather than looking at how it aggregates across the portfolio. This limits visibility. It becomes harder to identify concentrations, prioritize monitoring, and allocate resources effectively. A better approach is to step back and map exposure across the portfolio and identify where risk is most concentrated and where borrowers are most sensitive to margin shifts or refund dependency.

In this environment, control matters more than prediction

Perhaps the most important shift is this: the current environment cannot be modeled with precision. There are too many moving parts from policy changes, refund mechanisms, and evolving tariffs for forecasts alone to provide reliable guidance. What is proving far more effective is control.

Banks should strengthen fundamentals by: 

• Maintaining continuous engagement with borrowers 
• Refreshing data and assumptions regularly 
• Aligning credit, CECL, and risk teams around a shared view 
• Establishing clear escalation triggers as conditions change 

Internal audit is also playing a more active role – not simply reviewing outcomes but helping validate whether the underlying methodology and assumptions are sound.

Institutions that can demonstrate consistency, documentation, and alignment will be better positioned not only to manage risk, but to withstand regulatory and stakeholder scrutiny as this issue evolves.

The bottom line

Tariff volatility has introduced a new layer of complexity into credit risk – one that sits at the intersection of policy, borrower behavior, and financial performance. For mid-tier banks, the challenge is not simply understanding each moving part but knowing where to focus.

That focus is becoming clearer. Leading institutions are stepping back to assess portfolio exposure more holistically, recentering credit analysis on core operational performance rather than speculative inputs, and establishing alignment across credit, risk, and CECL. At the same time, greater discipline is being applied to how assumptions are formed, documented, and validated, particularly as internal audit and regulatory scrutiny begin to sharpen.

In this environment, the banks that will perform best are those that build structured, consistent frameworks for managing uncertainty. Cash is not cash until the path to it is credible.