Who could have imagined that European banks could be running out of dollars? Unbelievable! At this moment, the European Central Bank has urged eurozone credit institutions to assess the risks of a potential shortage of dollar liquidity amid concerns related to US President Donald Trump’s tariff policies. According to Reuters, the regulator is considering scenarios in which the Federal Reserve might refuse to provide dollars to its European partners. This scenario could materialize in the event of a global crisis.
Currently, nearly 20% of eurozone banks’ funding needs are denominated in USD. Typically, dollars are raised through short-term markets. However, during times of financial turmoil, these markets can abruptly shut down. In the past, European central banks were able to obtain dollars directly from the Federal Reserve via swap lines. Whether this option will remain available is uncertain.
Nonetheless, analysts see no immediate cause for alarm. Reuters notes that the Federal Reserve has not signaled any intention to withdraw from its current commitments. Still, market tensions persist. Recent doubts expressed by President Trump regarding the merits of longstanding alliances and trade agreements have added fuel to the fire, raising concerns over a possible shift in the Fed’s stance. Moreover, the White House has been stepping up pressure on Federal Reserve Chairman Jerome Powell. President Trump has repeatedly criticized Powell, whose term ends in a year, sparking fears over potential political interference in the Fed’s decision-making process.
In the meantime, European financial regulators are urgently demanding that banks assess the balance of their dollar-denominated assets and liabilities. This is necessary to identify potential gaps and either eliminate or minimize them. Some banks have even been instructed to restructure their business operations to reduce reliance on dollar funding.
Previously, Fed Chair Jerome Powell assured that the US central bank remained ready to provide dollar access to its partners. However, some financial institutions are now mulling over the risk of a refusal from the Federal Reserve. Many agencies estimate this risk at 5%, a significant jump from what was previously considered a zero-probability scenario.
Against this backdrop, some institutions are seeking ways to operate without using the US currency. According to the head of one ECB-regulated bank, his institution recently tested a model in which Fed swap lines were unavailable. Under such conditions, the bank could continue operating for an extended period, although new dollar transactions would be adversely affected. European banks without US subsidiaries, particularly those engaged in international trade and finance, are especially vulnerable. Most of them rely heavily on dollar funding, and this remains a critical issue.
