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Almost a quarter of European banks have insufficient US dollar funding to cover their exposures in the currency, fuelling concern among regulators about fragilities that could be exposed by rising geopolitical tensions.
The EU’s main banking regulator said in a report published on Thursday that 60 out of 267 banks with sizeable US exposures did not have enough dollar funding to cover them.
The findings of the European Banking Authority are likely to raise concerns about the EU’s vulnerability to any withdrawal of US dollar funding — a risk that intensified after Washington announced major tariffs on most EU imports on Wednesday, raising fears of a transatlantic trade war.
Some EU officials are raising doubts over whether they can still rely on US dollars to be provided by the Federal Reserve via a swap line with the European Central Bank, which has been a key part of how policymakers responded to previous financial crises. US dollars accounted for a fifth of the total funding for banks in the region, the EBA said.
The EBA also found that US banks have increased their share of the EU financial services market in recent years and gained a major presence in key product areas, such as derivatives trading in which they have almost 28 per cent of the market.
The regulator produced the report in response to a request by the European Commission that was made before Donald Trump won last year’s US presidential election and promised to impose tariffs on imports from the EU and many other countries.
However, the data is likely to be examined closely by policymakers as they consider the potential fallout from Trump’s tariffs on EU-US relations.
“This data may be very interesting from the point of view of the work being done by the European Commission on the EU’s economic independence and strategic autonomy,” Olli Castrén, head of economics and impact assessment at the EBA.
The EBA said the overall dollar funding position of banks in the 27 EU countries, as well as Norway, Iceland and Liechtenstein, had improved since its last study just over two years ago.
But it said banks still had a third of their assets in foreign currencies that were financed by a fifth of their liabilities denominated in foreign currencies.
The regulator said lenders “should pay attention” to any shortfall in foreign currency funding and ensure that these are either “rendered consistent or adequately hedged”.
The EBA also found that foreign-based banks have just over 10 per cent of the total banking assets in the EU, but they account for a much higher share of some specific markets.
Foreign-headquartered banks have a 40 per cent share of the market for interest rate derivatives and earn 77 per cent of all fees from commodities financing.
Some policymakers may be concerned about the strategic risk of relying so heavily on US banks for key parts of the financial services market. But Castrén downplayed those fears, saying: “The EU stands for free trade, so this shouldn’t be a major concern.”
US banks had increased their share of the EU market from 4 per cent in June 2021 to 4.6 per cent in December 2023, the EBA found.
In contrast, it said the EU market share of UK-based banks had declined from 5.7 per cent to 4.2 per cent — which may reflect the impact of Brexit on discouraging British banks from maintaining large EU operations.