Concerns Rise Over European Banks’ Dependence on U.S. Dollar

MILAN/LONDON – European banks are increasingly leaning on the U.S. dollar, as noted by Europe’s banking regulator. This marks a growing worry about the region’s susceptibility if access to dollar funding diminishes.

Globally, banks carry significant dollar exposures on their balance sheets, which could make them vulnerable if funding issues arise.

The anxiety surrounding dollar funding has been escalating since President Trump introduced a set of trade tariffs earlier this year, which, in turn, has exerted pressure on the Federal Reserve.

This situation has led some officials within the European Central Bank and other regulatory bodies to doubt the reliability of the Fed’s dollar funding during turbulent market conditions.

Philip Lane, the chief economist at the European Central Bank, mentioned last month that banks in the euro zone might experience pressure if dollar funding were to become scarce.

Data from the European Banking Authority reveals that dollar-denominated funding, including deposits from European banks, climbed to 13.1% of total funding by December 2024, up from 12.4% the previous year.

The exposure of banks to dollar-denominated assets also increased from 19.3% to 23%, according to the EBA.

Earlier this year, it was reported that both European and British regulators urged banks to conduct stress tests to assess their resilience against potential dollar shocks.

The EBA, which aims to safeguard and support the EU’s financial system, indicated that bank subsidiaries are relying on U.S. dollar funds at a quicker rate than their parent institutions.

The EBA’s study highlighted that significant growth in the share of dollar funds was particularly evident in securities financing transactions and unsecured wholesale funds.

Moreover, banking authorities have expressed concerns about “significant currency discrepancies” reflected in the balance sheets of European banks. This has prompted calls from regulators for closer scrutiny of lenders.

As of December 2024, the EBA reported that one-third of EU banking assets were in foreign currencies, contrasting with just one-fifth of their liabilities.

The International Monetary Fund emphasized earlier this month the importance for supervisors and banks to effectively manage liquidity risks across major currencies.

They remarked that individual financial institutions should closely monitor any considerable currency gaps in stable funding requirements unless they are adequately hedged.

The EBA further reported that some EU banks have a net stable funding ratio (NSFR) of under 100% for certain foreign currencies like the dollar, which is a concern for covering long-term assets.