Published by Global Banking & Finance Review®
Posted on May 14, 2025
6 min readLast updated: January 23, 2026
Add as preferred source on GoogleECB supervisors urge euro zone banks to evaluate dollar funding needs amid concerns over potential changes in Fed support under Trump.
By Stefania Spezzati, Jesús Aguado, Lawrence White, Elisa Martinuzzi
LONDON (Reuters) -European Central Bank supervisors are asking some of the region's lenders to assess their need for U.S. dollars in times of stress, as they game out scenarios in which they cannot rely on tapping the Federal Reserve under the Trump administration, three people with knowledge of the discussions said.
Nearly one-fifth of euro zone banks' funding needs are denominated in U.S. dollars, with the lenders borrowing in markets for short-term funding that can shut down abruptly in times of financial stress. In the past, European central banks borrowed dollars from the Fed, the source of the currency, to make up for the shortfall.
The Fed has lending facilities with the ECB and other major counterparts to alleviate shortages of the global reserve currency and to keep financial stress from spilling over into the United States.
Two of the sources familiar with the ECB supervisory discussions said the Fed had never suggested - including now - that it would not stand by those backstops.
Even so, with President Donald Trump’s questioning of long-held defence and trade agreements with European allies breeding mistrust, there are concerns the Fed’s position could change, said the sources, who requested anonymity to speak candidly about sensitive banking supervisory matters.
ECB supervisors are thus requesting as a matter of urgency that the region’s lenders assess gaps in their balance sheets, such as where they have lent out dollars to clients and financed other dollar-denominated assets but don’t have sufficient or reliable funding in that currency to meet liabilities, one of the sources said.
They are pressing some banks in the euro zone to reduce such gaps and in some cases demanding that they consider changing some of their business to make them less exposed to dollar funding, this person said.
The ECB declined to comment. The White House didn't respond to a request for comment.
The Fed also declined to comment and referred to a speech by Fed Chair Jay Powell in April where he said that the central bank remains prepared to provide dollars to counterparts. "We want to make sure that dollars are available," Powell said.
While the Fed is independent of the White House, Trump has frequently and openly criticised Powell, whose term runs out in a year, leading some to worry about the possibility of a less-independent Fed in future.
SIGNIFICANT RISK
The supervisory actions - previously unreported - follow a March report by Reuters that revealed some European central banking and supervisory officials were considering whether they could rely on the Fed for dollars under Trump.
In response to a query on the March report, Claudia Buch, the ECB's supervisory chief, told a parliamentary hearing that month that the ECB monitors liquidity in the banking system "very closely." She also warned of risks to liquidity from geopolitical shocks in the ECB's annual report on banking supervision.
While the questions about the Fed backstops involve risk assessments in situations considered highly unlikely, and while there is no stress on the dollar funding market at present, the precautionary supervisory requests show the extent of unease among the U.S.' closest allies.
A senior executive at one of the biggest lenders in Europe, which is not regulated by the ECB but by other authorities, said their bank is now assigning a 5% risk to a scenario in which Fed financing might not be available, up from zero a few months ago.
The person described that level of risk as "quite significant," and added that ways to address a dollar shortage such as reducing exposures and seeking alternatives will form part of the bank's risk discussions going forward.
Another senior European banking executive said their bank, which is regulated by the ECB, in recent weeks and for the first time modelled for a "tricky scenario" where the Fed swap lines would not be available. While the bank could keep trading for a prolonged period, it would come at a great cost for new activity in dollars, the executive said.
FUNDING GAPS
The European discussions reflect the sprawling, interlinked nature of big lenders and are relevant to financial stability.
Global banks, including some of Europe's biggest lenders, run huge balance sheets and have exposure to a range of currencies including the dollar. They can often operate in different currencies and their assets and liabilities can have various durations.
In its Financial Stability Review last November the ECB said 17% of euro zone banks’ funding was in dollars. These banks raised the bulk of that in U.S. funding markets, such as commercial paper and overnight repurchase agreements, where they borrowed dollars against Treasuries and other collateral.
They used those dollars to lend to non-banks in the euro zone and finance other client activities such as trade.
Those funding sources could dry up in the event of stress, and when banks lose trust in each other. That's where the Fed's arrangements come in.
Most recently, the system was tested in March 2023 when Credit Suisse ran into trouble. As the market's confidence in the Swiss lender withered and clients withdrew tens of billions of dollars, its peers quickly reduced their exposure to the bank, Reuters reported at that time. The Fed provided tens of billions of dollars to the Swiss National Bank, which in turn enabled Credit Suisse to meet client demand for cash, averting a broader crisis.
One of the sources familiar with the latest supervisory discussions said that while replacing liquidity lines from central banks isn't a task for banks, they can do more to ensure they have the liquidity available in the right currency.
Regulators typically tolerate some gaps in liquidity and duration - or mismatches in the periods over which assets and liabilities mature - but are now pressing banks to reduce them, the person said.
In some cases, European banking supervisors have asked them as part of their recent requests to consider changes in their business models to better match currency liquidity needs with their funding sources, the person added.
Banks can trim their dollar-denominated liabilities by reducing their activities in certain markets or business lines. For instance, European lenders that do not have a U.S. subsidiary and are active in global commerce, such as in financing shipping, can have large exposure to dollars, most likely causing a liquidity imbalance in their balance sheets, said one European banking regulator not directly involved in bank supervision.
Reuters was unable to obtain further details of the kinds of businesses coming under such pressure.
(Additional reporting by Francesco Canepa and Tom Sims in Frankfurt; Editing by Paritosh Bansal and Hugh Lawson)
The article discusses ECB supervisors urging euro zone banks to assess their dollar funding needs amid concerns over potential changes under Trump's administration.
They are concerned about the reliability of dollar funding from the Federal Reserve due to geopolitical tensions and Trump's policies.
Banks are assessing their dollar funding gaps and modeling scenarios where Fed swap lines might not be available.
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