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.