European banks increased their reliance on U.S. dollars last year, Europe’s banking regulator said on Monday, amid growing concerns about the region’s vulnerability should dollar financing dry up.
Banks globally have significant dollar exposure in their balance sheets, making them vulnerable to potential funding shocks.
Dollar funding fears have grown since U.S. President Trump announced a wave of trade tariffs and began putting pressure on the Federal Reserve earlier this year.
That has led some European central banking and supervisory officials to question whether they can still rely on the Fed to provide dollar funding in times of market stress.
The European Central Bank’s Chief Economist Philip Lane said last month that euro zone banks may come under pressure if dollar funding were to dry up.
The European Banking Authority said in a new report that European banks’ funding in dollars including deposits represented 13.1% of their total funding in December 2024, up from 12.4% a year earlier.
Banks’ total exposure to assets denominated in dollars also rose to 23% from 19.3%, the EBA said.
Reuters reported earlier this year that European and UK regulators have asked banks to monitor and stress test their resilience to dollar shocks.
The EBA – which has a mandate to protect and support the EU financial system – also said that data indicated banks’ subsidiaries are increasing their reliance on U.S. dollar funding at a faster pace than their parent entities.
The share of dollar funding increased the most during 2024 for securities financing transactions and unsecured wholesale funding, the EBA study shows.
BANKS FACING A ‘MEANINGFUL CURRENCY MISMATCH’
The banking authority also warned about “a rather meaningful currency mismatch” in European banks’ balance sheets, something regulators in Europe have asked lenders to monitor, Reuters has reported.
The EBA added that, as of December 2024, one third of EU banks’ assets were denominated in foreign currencies, compared with just one fifth of their liabilities.
Earlier in October, the International Monetary Fund said supervisors and banks should effectively monitor and manage liquidity risks in significant currencies.
“At the individual institution level, attention needs to be paid to any significant currency gaps in the stable funding requirements unless these are adequately hedged,” the regulator added.
Some EU banks have a net stable funding ratio (NSFR) – a measure of stable funding to cover a lender’s long-term assets – below the 100% minimum in some foreign currencies including the dollar, the EBA said.
(Reporting by Valentina Za in Milan and Stefania Spezzati )
