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ECB's Lane flags dollar risk for banks amid tariff turmoil
Published by Global Banking and Finance Review
Posted on October 21, 2025
3 min readLast updated: January 21, 2026
Global Banking and Finance Review
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Published by Global Banking and Finance Review
Posted on October 21, 2025
3 min readLast updated: January 21, 2026
ECB's Philip Lane warns euro zone banks of dollar funding risks amid tariff concerns, advising careful management of dollar exposure.
FRANKFURT (Reuters) -Euro zone banks may come under pressure if U.S. dollar funding - the lifeblood of financial markets - were to dry up, the European Central Bank's chief economist Philip Lane said on Tuesday amid concern over U.S. President Donald Trump's policies.
Dollar funding fears have been at the back of central bankers' minds since Trump announced a wave of trade tariffs and began putting pressure on the Federal Reserve earlier this year.
Lane said euro zone banks had navigated the turmoil well but could still find themselves in a tight spot given their significant exposure to the dollar, which accounted for anywhere between 7% and 28% of all their liabilities and 10% of assets in the second quarter of the year.
Any sudden changes in these net exposures could not be ruled out and could potentially limit banks' lending to the economy, he said.
"An increased probability of such a risk event would then generate pressures on both sides of banks’ balance sheets and potentially downward pressure on on-balance sheet exposures like loans to the real economy," Lane added.
European banks typically borrow dollars from U.S. banks and other financial institutions. This makes this form of funding less reliable in a crisis than deposits, which tend to move more slowly.
ECB supervisors have been telling banks to watch their dollar exposures and reduce any mismatch between their assets, such as loans, and liabilities - each bank's own borrowing.
Central bankers from outside the United States have even toyed with the idea of pooling their dollar reserves to backstop banks in case the Fed were to withdraw its emergency swap lines.
But any such cooperation, as well as being politically difficult, was unlikely to suffice given the multi-trillion-dollar size of the international market for loans denominated in the U.S. currency.
In a bid to avert a dollar squeeze, the Federal Reserve has kept swap lines with other central banks since the last financial crisis. These facilities essentially let commercial lenders outside the U.S. borrow dollars from their own central banks when they cannot source them on the market.
Lane noted that euro zone banks had built up their cash buffers in U.S. dollars, with their liquidity coverage ratio, or LCR, rising from some 85% at the end of 2021 to well above 110% now. A ratio above 100% indicates that a bank has enough high-quality, easily sellable assets to cover total net cash outflows over a 30-day stress period.
This allowed them to withstand pressure during the market gyrations in April, for example, when U.S. Treasuries sold off at the same time as the dollar weakening, depriving banks of their usual hedge against any losses.
"Since the euro area banking system has made progress in increasing their USD LCRs in recent years...it did not experience sizeable liquidity strains even at the height of the exchange rate volatility in early April, though the episode may have altered the algebra of liquidity management for the remainder of the year," Lane said.
(Reporting By Francesco Canepa; Editing by Alex Richardson and Hugh Lawson)
Dollar funding refers to the process of obtaining U.S. dollars to finance operations, particularly for banks that need to manage their foreign currency liabilities.
The liquidity coverage ratio (LCR) is a measure of a bank's ability to meet its short-term obligations, calculated by comparing high-quality liquid assets to total net cash outflows.
Currency hedging is a risk management strategy used to protect against fluctuations in exchange rates, often involving financial instruments like options and futures.
Monetary policy refers to the actions taken by a central bank to control the money supply and interest rates to achieve macroeconomic objectives like controlling inflation and stabilizing currency.
Foreign exchange (forex) is the global marketplace for trading national currencies against one another, influencing exchange rates and international trade.
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