European Banks' Dollar Funding Vulnerability: EBA Report Analysis

This analysis is based on the Reuters report [1] published on November 3, 2025, which detailed the European Banking Authority’s findings on European banks’ increasing dollar funding dependence.

The EBA’s comprehensive assessment reveals a concerning trend in European banking sector funding structures. Dollar funding, including deposits, increased to 13.1% of total funding by December 2024, up from 12.4% a year earlier [1]. This expansion in dollar dependence is accompanied by a more significant increase in dollar-denominated assets, which rose to 23% of total assets from 19.3% [1]. The data indicates a “rather meaningful currency mismatch” in European banks’ balance sheets, with subsidiaries increasing dollar dependence faster than parent entities [1].

The market reaction on November 3, 2025, showed broader weakness, with major U.S. indices declining: S&P 500 (-0.66%), NASDAQ (-0.54%), and Dow Jones (-0.96%) [0]. European banking stocks displayed mixed performance, with UBS Group AG declining 1.34% to $37.84, potentially reflecting dollar funding concerns, while Banco Santander showed resilience with a 0.54% gain to $10.21 [0].

: The structural imbalance is particularly concerning - 68% of EU banks’ funding is in euros, but 19% is in dollars, creating concentration risk [2]. More critically, one-third of EU banks’ assets are denominated in foreign currencies versus only one-fifth of liabilities, indicating potential hedging challenges and liquidity management weaknesses [1].

: Some banks have net stable funding ratios (NSFR) below the 100% minimum in certain foreign currencies including dollars [1]. This suggests that despite regulatory oversight, liquidity management practices may not be keeping pace with the rapid expansion in dollar-denominated activities.

: This development follows growing concerns about dollar funding availability since U.S. President Trump announced trade tariffs and pressured the Federal Reserve earlier in 2025 [1]. European central banking officials have questioned whether they can rely on Fed dollar funding during market stress periods, adding geopolitical uncertainty to the funding risk equation.

The combination of rising dollar asset exposure (23% of total) with insufficient stable funding ratios creates potential liquidity vulnerabilities [1].

Key risk factors include:

• Liquidity Risk
  : Some banks falling below 100% NSFR minimum in dollar funding indicates potential short-term funding vulnerabilities [1]
• Market Stress Vulnerability
  : Historical precedents from 2008 and March 2020 demonstrated how quickly dollar funding markets can seize up [1]
• Regulatory Response Risk
  : Potential supervisory actions from EBA, ECB, and national regulators could impact bank operations
• Geopolitical Uncertainty
  : Trade tensions and questions about Fed swap line reliability add complexity to funding risk assessment [1]

The increased transparency from EBA reporting provides opportunities for enhanced risk monitoring:

• Stress Test Development
  : Regulators have asked banks to stress test dollar resilience, which should provide more granular risk assessment
• Improved Disclosure
  : Individual banks’ quarterly reports may offer better insights into currency risk management practices
• Market-Based Indicators
  : Dollar funding spreads in FX swap and repo markets can serve as early warning signals

The EBA data reveals that European banks’ dollar funding reliance increased through securities financing transactions, unsecured wholesale funding, and faster growth in subsidiaries than parent entities [1]. This suggests expansion in international trade finance, cross-border lending, or investment banking operations.

Critical information gaps remain regarding individual bank exposure levels, hedging effectiveness, stress test results, and current Fed swap line access status. The geographic distribution of dollar funding pressures and specific business lines driving increased dependence require further investigation for comprehensive risk assessment.

Historical context suggests that dollar funding stress episodes can develop rapidly, forcing central banks to provide emergency liquidity facilities. The current political environment adds uncertainty to the reliability of such backstops, making the currency mismatch particularly concerning for financial stability [1].