The European Central Bank published analysis in its Financial Stability Review on euro area banks’ US dollar assets and liabilities, concluding that these exposures are driven mainly by wholesale capital markets activities concentrated among euro area global systemically important banks. The ECB highlights that the short-maturity, mark-to-market and margining features of this business can create liquidity risk for banks during abrupt market moves, with knock-on effects for euro area corporates and non-bank financial institutions that rely on banks for US dollar funding and hedging. US dollar balance sheets are dominated by capital market positions rather than traditional loans and deposits, with “other financial assets and liabilities” (primarily derivatives at fair value) the largest category, followed by repo borrowing, debt securities funding and holdings of debt securities. Dollar-denominated lending is estimated to be at least EUR 700 billion (9.2% of the total loan book), largely to non-euro area corporate and non-bank financial clients, while securities holdings are mainly high-quality liquid assets such as US Treasuries and agency mortgage-backed securities. The review also points to sizeable off-balance-sheet US dollar liabilities created via foreign exchange swaps used to hedge euro area investors’ dollar assets, and notes that rolling such synthetic funding can become challenging when foreign exchange swap markets are stressed. While the ECB assesses asset-liability mismatch as limited, it finds that mismatches between counterparties providing and receiving funding still expose banks to liquidity risk, and that extreme US dollar outflows could exhaust banks’ capacity to raise cash through repos, FX swaps or asset sales, especially if liquid asset values fall. Net outflows may be covered by US dollar liquid assets over longer horizons, but the concentration of outflows in the short term could force some banks to seek additional dollar funding or rely on maturing short-term assets, which would reduce US dollar intermediation to counterparties. The ECB notes there is no regulatory requirement to match the currency composition of liquid assets and liabilities, but argues that holding liquid US dollar assets and maintaining capital and US dollar liquidity buffers supports banks’ ability to continue providing US dollar services in stress.
European Central Bank 2025-11-01
European Central Bank reviews euro area banks’ US dollar intermediation and highlights potential liquidity risks
The European Central Bank's Financial Stability Review highlights that euro area banks' US dollar exposures, driven by wholesale capital markets activities, pose liquidity risks during market disruptions. These exposures are concentrated among global systemically important banks and dominated by derivatives and repo borrowing. The ECB emphasizes maintaining US dollar liquidity buffers to mitigate risks and ensure continued service provision during stress periods.