Amid Tariff Turmoil, ECB’s Lane Warns of Dollar Funding Risks for Banks

European Central Bank (ECB) Chief Economist Philip Lane on Tuesday cautioned that eurozone banks could come under pressure if U.S. dollar funding—the lifeblood of global financial markets—were to dry up, amid growing concerns over U.S. President Donald Trump’s policy stance.

Ever since Trump announced new trade tariffs earlier this year and began exerting pressure on the Federal Reserve, central bankers have been uneasy about the potential for disruptions in dollar funding.

Lane said that while eurozone banks have so far managed to navigate the turbulence well, their significant exposure to the dollar could still leave them vulnerable. In the second quarter, dollar-denominated liabilities accounted for between 7% and 28% of banks’ total liabilities, while dollar assets made up about 10%.

He cautioned that any sudden shift in these net exposures could not be ruled out and might lead to a tightening in lending to the broader economy.

“The likelihood of such a risk event would exert pressure on both sides of bank balance sheets,” Lane said, “and could ultimately constrain exposures such as loans to the real economy.”

European banks typically borrow dollars from U.S. banks and other financial institutions, making such funding less reliable in times of market stress compared to customer deposits, which move more gradually.

ECB supervisors have instructed banks to closely monitor their dollar exposure and minimize mismatches between their assets—such as loans—and their liabilities, or borrowings.

Outside the United States, some central bankers have even contemplated accumulating additional dollar reserves to support banks in case the Federal Reserve withdraws its emergency swap lines.

However, such coordinated action would be both politically difficult and likely insufficient, given the multi-trillion-dollar scale of international lending denominated in U.S. currency.

To prevent dollar shortages, the Federal Reserve has maintained swap lines with other major central banks since the last financial crisis. These facilities allow commercial lenders outside the U.S. to borrow dollars from their own central banks when market access becomes constrained.

According to Lane, eurozone banks have built up stronger dollar cash buffers, with their liquidity coverage ratio (LCR) rising from around 85% at the end of 2021 to well above 110% today. An LCR above 100% indicates that banks hold enough high-quality, easily sellable assets to cover total net cash outflows during a 30-day stress period.

This improved liquidity position helped banks weather volatility earlier this year—such as in April, when U.S. Treasuries sold off amid dollar weakness, forcing banks to unwind their usual hedging positions.

“Given the progress euro-area banks have made in improving their USD LCRs,” Lane said, “the banking system experienced only limited liquidity strain even during the peak of exchange-rate volatility in early April—though the episode likely reshaped liquidity management practices for the remainder of the year.”