An increased reliance on the U.S. dollar by European banking institutions over the preceding year was officially confirmed by the region’s banking regulator on a Monday. This finding surfaced amidst persistent and escalating concerns regarding the vulnerability of the euro zone should the availability of dollar financing experience a sudden and disruptive contraction. It has long been understood that banking organizations globally maintain significant exposure to the dollar across their balance sheets, a structural characteristic which inherently leaves them susceptible to potential funding shocks originating in foreign markets.
Fears pertaining to the stability of dollar funding mechanisms have been visibly amplified since a wave of trade tariffs was announced by the U.S. President earlier in the year, actions which were also accompanied by increased political pressure being directed toward the U.S. Federal Reserve. This heightened geopolitical context has prompted European central banking and supervisory officials to seriously question their continued reliance on the Federal Reserve to automatically provide emergency dollar funding during periods of intense market stress. The potential for such a funding crunch was previously addressed, as it had been noted by the European Central Bank’s Chief Economist that institutions within the euro zone could well come under significant pressure if access to crucial dollar funding were to suddenly become restricted.
Specific metrics detailing this rising dollar dependency were provided in a new report issued by the European Banking Authority (EBA). It was reported that the total funding procured by European banks in dollars, including customer deposits, represented 13.1 percent of their aggregate funding base as of December 2024. This figure was stated to be an observable increase from the 12.4 percent level recorded a year earlier. Simultaneously, the total exposure held by these banks to assets denominated in dollars was also found to have risen substantially, increasing to 23 percent from the previous level of 19.3 percent. This dual-sided growth in both dollar assets and dollar funding underscores the deepening integration of European financial entities into the U.S. currency ecosystem.
The supervisory body, which is mandated with the responsibility of safeguarding and supporting the EU financial system, additionally noted that the data indicated a more rapid pace of increasing reliance on U.S. dollar funding within banks’ subsidiary entities when compared with the rate observed among their parent institutions. Furthermore, the EBA’s study showed that the largest increases in dollar funding during 2024 were concentrated specifically within securities financing transactions and the category of unsecured wholesale funding. These particular funding channels are generally considered to be less stable or more sensitive to market disruptions than traditional customer deposits, thereby adding an extra layer of structural risk.
A specific warning was issued by the banking authority regarding the presence of a “rather meaningful currency mismatch” within the balance sheets of European banks. This imbalance is an issue that regulators across Europe had already instructed lenders to monitor closely. The EBA report clarified the extent of this mismatch by confirming that, as of December 2024, approximately one-third of EU banks’ total assets were denominated in foreign currencies, contrasting sharply with the fact that only one-fifth of their corresponding liabilities were similarly denominated. This asymmetry means that the banks possess a net long position in foreign currencies, which creates exposure to sudden exchange rate volatility and could exacerbate funding difficulties if foreign markets seize up.
In response to these systemic vulnerabilities, regulatory bodies across Europe and the UK have previously requested that banks actively monitor and stress test their resilience against various potential dollar shocks. This regulatory imperative has been reinforced by international bodies. Earlier in October, it had been stated by the International Monetary Fund (IMF) that supervisors and individual banking institutions must effectively monitor and diligently manage liquidity risks across all significant foreign currencies. Attention was also required to be paid to any substantial currency gaps that may exist within the Net Stable Funding Ratio (NSFR) requirements, unless these gaps were confirmed to be adequately hedged through appropriate financial instruments. The NSFR is a key measure of a lender’s ability to cover its long-term assets with stable funding sources. Disturbingly, the EBA’s report revealed that some EU banks had been found to possess an NSFR below the 100 percent minimum threshold in certain foreign currencies, the dollar included. This finding signals a direct failure to meet a core global liquidity standard in a vital international currency, confirming that the potential for funding shortfalls in the event of a market crisis remains a serious concern for European financial stability.
