European Officials Consider Dollar Pooling to Reduce Fed Reliance Amid Geopolitical Tensions

This analysis is based on the Reuters report [1] published on November 13, 2025, which revealed that European financial stability officials are debating the creation of an alternative to Federal Reserve funding backstops. The initiative aims to pool dollars held by non-U.S. central banks to reduce reliance on the U.S. under the Trump administration, reflecting growing concerns about the intersection of monetary policy and geopolitics in global financial stability arrangements.

The discussions represent a fundamental shift in international financial cooperation, moving from technical considerations to political factors as the primary driver [1]. European officials’ concerns peaked around April 2025 when Trump’s “Liberation Day” tariffs disrupted global financial systems, exposing vulnerabilities in banks’ funding plans and raising questions about the reliability of Federal Reserve swap lines [1]. The adversarial posture of the Trump administration toward historical allies has created uncertainty about whether domestic political considerations might affect swap line availability during future crises [2].

While European officials acknowledge the strategic importance of reducing Fed reliance, they recognize significant practical limitations to dollar pooling as a complete alternative [1]. Non-U.S. central banks collectively hold hundreds of billions of dollars in cash, but this capacity pales in comparison to the Federal Reserve’s near-bottomless ability as the issuer of the world’s reserve currency [1]. The Federal Reserve’s swap lines demonstrated their critical importance during the COVID-19 pandemic, with usage peaking at $449 billion in 2020 [1]. Analysis suggests that pooled arrangements could help manage bouts of instability but would likely be insufficient to contain broad market turbulence [1].

The initiative has triggered increased regulatory scrutiny of European banks’ dollar funding strategies. ECB supervisors are pressing lenders to develop plans for sourcing dollars in alternative markets such as Asia and the Middle East, along with conducting stress testing of their dollar funding capabilities [1]. Two euro zone banking executives confirmed that supervisors are intensifying their oversight of dollar funding risks, potentially increasing funding costs and reducing operational flexibility [1]. The U.S. dollar’s dominance in international banking remains substantial, with approximately 55% of international claims and 60% of liabilities denominated in dollars [5].

European discussions draw inspiration from existing regional financial cooperation arrangements, particularly the Chiang Mai Initiative Multilateralization (CMIM) [1]. This Asian framework, involving ASEAN nations plus China, Japan, and South Korea, has created a $240 billion pooled reserve facility that provides liquidity to member economies facing balance-of-payments crises [6][7]. However, despite being the second-largest regional financing arrangement globally, the CMIM has been chronically underutilized, highlighting the challenges of implementing alternative financial safety nets [7].

Bank of Japan Governor Kazuo Ueda has emphasized the importance of maintaining a multi-layered approach to swap lines and similar arrangements [1]. This perspective suggests that regional initiatives like dollar pooling could complement rather than replace existing Fed facilities, creating redundant layers of financial protection. The discussions reflect a broader recognition that global financial stability requires diverse funding sources and institutional arrangements to withstand geopolitical pressures.

The timing of these discussions aligns with upcoming leadership transitions at the Federal Reserve. Fed Chair Jerome Powell’s term ends in May 2026, with Trump indicating he could select the next chair by the end of 2025 [1]. This succession uncertainty amplifies concerns about the future reliability of Fed facilities and creates a natural inflection point for reassessing international financial arrangements. European officials are adopting a “worst-case scenario” planning approach, recognizing that while immediate concerns may have eased following Fed assurances, underlying structural vulnerabilities remain [1].

Officials note that any hint from the Fed about discontinuing swaps could itself trigger broad stress in the global financial system [1]. This creates a paradox where preparing for reduced Fed reliance could inadvertently increase market volatility. One top central banker observed that in a scenario where Fed swaps become unavailable, it would be politically challenging for any central bank to defend offering its limited dollar reserves to another party, as domestic needs would likely take priority [1].

• Geopolitical Escalation
  : The primary risk stems from the potential weaponization of dollar liquidity facilities for political leverage, which could disrupt global financial stability [1][2]
• Implementation Challenges
  : Technical obstacles including scale limitations, political coordination difficulties, and legal framework establishment across different jurisdictions [1]
• Market Destabilization
  : The paradox where preparing for reduced Fed reliance could itself trigger market stress and volatility [1]
• Banking Sector Vulnerability
  : European banks face increased funding costs and reduced operational flexibility due to heightened regulatory scrutiny of dollar funding strategies [1]

• Enhanced Financial Resilience
  : Development of alternative funding sources could create a more robust global financial system less susceptible to single-point failures
• Regional Cooperation Strengthening
  : The initiative could accelerate development of regional financial safety nets and improve coordination among central banks
• Diversification of Funding Sources
  : Banks developing alternative dollar funding strategies may reduce concentration risk and improve overall liquidity management
• Innovation in Financial Architecture
  : The discussions could spur development of new financial instruments and institutional arrangements for global liquidity provision

• European financial stability officials are debating dollar pooling initiatives at staff level, with involvement from ECB and national central banks within and outside the euro zone [1]
• Federal Reserve swap lines remain critical infrastructure, with usage peaking at $449 billion during the 2020 COVID-19 pandemic [1]
• The U.S. dollar maintains dominant position in international banking, representing 55% of international claims and 60% of liabilities [5]
• ECB supervisors are intensifying oversight of banks’ dollar funding strategies, requiring alternative market sourcing plans and enhanced stress testing [1]
• Implementation faces substantial practical challenges, with pooled arrangements likely insufficient to replace Fed facilities completely [1]
• The Chiang Mai Initiative serves as a precedent but has been chronically underutilized, highlighting implementation difficulties [7]
• Succession planning at the Federal Reserve, with Powell’s term ending in May 2026, creates additional uncertainty about future arrangements [1]