ECB flags dollar liquidity risks for euro area banks
European Central Bank (ECB) chief economist Philip Lane warned that euro area banks could face pressure if access to US‑dollar funding tightens, a key lifeline for global markets.
Lane said that, against a backdrop of US trade restrictions and currency‑market volatility, concerns persist about the resilience of dollar funding. He noted that banks have coped with recent strains, but their sizable reliance on the greenback remains a vulnerability.
According to the ECB, in the second quarter around 28% of euro area banks’ total liabilities and about 10% of their assets were in US dollars. Put simply, a meaningful share of banks’ debts and investments is denominated in USD. Lane explained that sharp moves in their dollar net position (the gap between how many dollars a bank owes and how many dollar assets it holds) can quickly disrupt day‑to‑day operations. In such moments, banks may need to raise dollar funding at short notice or sell assets, which can curb lending to businesses and households and strain both sides of their balance sheets.
Supervisors are urging banks to monitor their dollar exposures more closely and to reduce the mismatch between what they owe and what they own in USD.
During periods of market stress, access to dollar liquidity is often supported by the Federal Reserve’s swap lines with other central banks. Even so, the international market for USD borrowing, measured in trillions, remains vulnerable to shocks.
At the same time, Lane pointed out that banks have increased their buffers of high‑quality liquid assets in dollars: the USD liquidity coverage ratio (LCR) has risen from roughly 85% to above 110%. This helped the system absorb tensions in early April, when dollar weakness coincided with a sell‑off in US Treasuries and reduced the usual hedge against price declines.
Lane concluded that banks should take a cautious approach to borrowing in dollars and protecting their balance sheets against currency risk.
Recommended