European banks are increasing reliance on US dollar funding, EU regulators have found

European banks increased their reliance on the US dollar last year, Europe’s banking regulator said, amid growing concerns about the region’s vulnerability if dollar financing is reduced.

Banks around the world have significant dollar exposure on their balance sheets, making them vulnerable to potential funding shocks.

Dollar funding concerns have increased since US President Trump announced a wave of trade tariffs and began applying pressure on the Federal Reserve earlier this year.

This has led some European central banks and their supervisory officials to question whether they can still rely on the Fed to provide dollar funding at a time when markets are stressed.

European Central Bank Chief Economist Philip Lane said last month that euro zone banks may come under pressure if dollar funds dry up.

The European Banking Authority said in its 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.

The bank’s total exposure to dollar-denominated assets also increased to 23% from 19.3%, the EBA said.

Reuters reported earlier this year that European and British regulators had asked banks to monitor and test their resilience to dollar shocks.

The EBA – which has a mandate to protect and support the EU’s financial system – also said that data showed that bank subsidiaries were increasing their reliance on US dollar funding at a faster pace than their parent entities.

The share of dollar funding increases the most through 2024 for securities financing transactions and wholesale unsecured funding, according to the EBA study.

BANK FACES ‘SIGNIFICANT CURRENCY ERRORS’

Banking authorities also warned of “significant currency mismatches” in European banks’ balance sheets, something regulators in Europe have asked lenders to monitor, Reuters reported.

The EBA added that, by December 2024, a third of EU banks’ assets were denominated in foreign currency, compared with just a fifth of their liabilities.

Earlier in October, the International Monetary Fund (IMF) said supervisors and banks must effectively monitor and manage liquidity risks in major currencies.

“At the individual institution level, attention needs to be paid to significant currency gaps in stable funding requirements unless such gaps are adequately hedged,” the regulator added.

Some EU banks have net stable funding ratios (NSFR) – a measure of stable funding to cover a lender’s long-term assets – below the minimum of 100% in some foreign currencies including the dollar, the EBA said.
Source: Reuters