Euro zone lenders with large dollar operations have been urged to strengthen their liquidity and capital positions to guard against instability in the U.S. currency, according to a fresh warning from the European Central Bank on Wednesday, reported by Reuters.
The emphasis comes as President Donald Trump’s actions continue to unsettle global markets, particularly through tariffs and repeated public pressure on the Federal Reserve, which earlier this year weakened confidence in the world’s reserve currency.
The guidance appears in the ECB’s latest Financial Stability Review, a twice-yearly assessment that, while not binding, reflects the deepest concerns of policymakers monitoring cross-border financial risk. The review sharpened earlier signals sent to banks this spring, when officials first warned institutions to monitor their exposure to dollar funding strains. This time, the central bank named the high-exposure lenders and urged a more concrete response.
The ECB said in the report that major eurozone banks operating heavily in dollars should expect greater currency swings and counterparty concerns. It advised that “capital headroom could be needed to absorb … higher currency volatility and counterparty credit risk,” adding that banks should hold enough liquid U.S. dollar assets to steady their balance sheets and meet possible outflows.
The warning sits alongside broader concerns outlined in the review, including elevated equity-market valuations, global debt burdens, tariff disputes, and the growing footprint of stablecoins, which regulators fear could trigger risks across payment systems.
While the publication is not a list of mandatory rules, its tone highlights the scale of anxiety inside the ECB over dollar liquidity. Euro zone banks rely heavily on repurchase agreements and foreign-exchange swaps to obtain short-term dollar funding. In an extreme stress event, the ECB cautioned that lenders could run through their access to repos, FX swaps, and asset sales.
The review stopped short of describing the worst case, but one scenario — though not mentioned directly — would be the Federal Reserve withdrawing access to its emergency swap line with the ECB, a backstop that banks have leaned on since the global financial crisis.
Officials speaking privately have even discussed, according to Reuters sources, the idea of pooling dollar and gold reserves outside the United States as a protective measure, though this has not moved beyond preliminary thinking.
Presenting the review in Frankfurt, ECB Vice President Luis de Guindos dismissed speculation that swap lines might be cut off. He underscored their value in calming markets on both sides of the Atlantic, saying: “We do not have any sort of information with respect to the modification of the present situation, with respect to swap lines. These bilateral swap lines are very important factors to keep financial stability in place on both sides of the Atlantic.”
New York Fed President John Williams earlier this month also voiced strong support for maintaining those channels, noting they benefit both the United States and its partners.
The ECB identified the bloc’s primary dollar-heavy institutions as BNP Paribas, Deutsche Bank, Credit Agricole, Groupe BPCE, ING, Banco Santander, and Société Générale. Their dollar operations often involve borrowing in U.S. money markets to finance hedge funds or issuing FX swaps to European insurers, funds, and corporates seeking to hedge their exposure. To cushion their own exposure, these banks typically take opposite positions with global lenders through swaps that remain largely off-balance sheet.
Those rollover positions, the ECB said, can become difficult to maintain whenever the FX swap market is under stress. The central bank noted that while it sees only a limited mismatch between dollar assets and liabilities for now, banks are increasingly using repos to align maturities. That strategy, the report stressed, “does not fully eliminate liquidity risk.”
ECB data shows euro zone banks held €681 billion in dollar-denominated securities at the end of last year, while extending loans worth the equivalent of €712 billion in U.S. currency.
Taken together, the review signals that eurozone lenders with deep exposure to dollar markets need to tighten their cushions at a time when global uncertainty is being amplified by policy shifts in Washington. While market conditions remain calm for now, the ECB’s tone suggests an expectation that volatility in the dollar could flare again — and that the banks most reliant on it should be ready.
