now loading...
I wrote recently that US dollar borrowing by European issuers in the bond and syndicated loan markets fell to a 10‑year low in 2025. I found that an interesting datapoint and used it to urge European policymakers to capitalize on the momentum and take assertive action to get Europe out of the line of fire of constrained or weaponized access to US dollars.
While I wanted to focus on the capital markets angle then, I was acutely aware that a more perilous vulnerability lies not in bond or loan issuance but in European banks’ structural and operational dependence on ultra-short-dated US dollar liquidity and the way the market plumbing works in stressed markets. Recent developments in the US dollar repurchase ( repo ) market have again revealed how perilous that exposure can be.
Let’s back up a little. Eurozone banks are naturally long euros and short US dollars. Their activities, from commodity and trade financing to global markets to dollar clearing and beyond, generate dollar assets, but their deposit bases are overwhelmingly in euros. Dollar dependence is partly cemented by the euro's limited role in trade invoicing.
The mismatch is inescapable. On a day‑to‑day basis, it means European banks are forced to bridge the gap via three inter‑linked channels: FX swaps, repo markets, and issuance of short-dated unsecured money market instruments.
These are all intensely confidence-sensitive, ultra-short-term wholesale markets dominated by US counterparties, and they operate largely outside Europe’s regulatory and market perimeter. Europe’s banking system is, in short, functionally dependent on the goodwill of US private markets and the Federal Reserve against the backdrop of an increasingly unpredictable White House.
Enormous scale
The scale is enormous. Gross outstandings of European banks’ EUR/USD FX swaps ( where banks receive dollars against euro collateral ) are estimated to be in the region of €3 trillion ( US$3.5 trillion ), 55% of which matures overnight. The underlying net USD shortfall sits at around €1.2 trillion and 11% of that matures each day, meaning Europe’s banks – and that’s predominantly its largest institutions – have to roll €135-140 billion every day.
European banks’ US dollar repo outstandings, of 30‑day or shorter maturities, are around €1.6 trillion equivalent. Beyond the fact that US money‑market funds are the dominant lenders to European banks in repo – a vulnerability in itself – these are secured transactions that lock up high‑quality collateral, the very collateral banks rely on in a crisis, reducing room for manoeuvre just when dollar liquidity tightens. Meanwhile, European banks’ unsecured US dollar money‑market outstandings ( with average maturities of 30 days ) are €500-700 billion equivalent.
All in all, data points from the European Central Bank and Bank for International Settlements estimate that European banks have to roll anything between US$100 billion and US$250 billion of balance‑sheet dollar funding. Every. Single. Day. Both institutions are concerned about this, and they’re right to be: if US dollars provide 17% of European banks’ funding, that rises to a third for the most internationally active institutions.
FX swaps are particularly troubling for supervisors. These are off‑balance‑sheet items and, as such, are not captured by regulatory solvency or leverage ratios. And with more than half of EUR/USD swap volumes done on an overnight basis, banks can lose access to hundreds of billions of dollars at the drop of a hat if counterparties stop rolling. And make no mistake: there’s no signalling or gradual deterioration. It’s a smooth, slippery, sheer granite cliff.
Systemic squeeze
Actions in the repo market taken by central counterparty clearing houses ( CCPs ) in recent days, triggered by market volatility as a result of the war in the Middle East and its global knock-on impacts, have starkly illustrated the vulnerability. CCPs, the parties that sit in the middle of transactions and guarantee them, have a huge impact on Europe’s access to dollars.
The mechanism is brutally efficient. In recent days, I’ve seen reports that European bank counterparties have been receiving intraday demands to cover mark-to-market losses. Banks have built their liquidity frameworks around overnight cycles, not repeated intraday calls. And because the pool of eligible collateral has also shrunk, banks have been forced to post more cash. At the same time, upfront collateral requirements have increased as risk models reset to account for volatility and valuation uncertainties, valuation discounts ( haircuts ) have risen, and dealers have added cross-currency surcharges on dollar exposures.
In short, the cost of swapping euros into dollars has spiked at the very moment European banks most need them, while the vulnerability window is measured in hours. The actions of CCPs may be prudent at the clearing-house level, but they create a self-reinforcing systemic liquidity squeeze on the dollar funding that European banks depend on.
The Fed’s swap line with the ECB is the ultimate backstop, but it’s discretionary and designed for temporary market dysfunction – not sustained structural stress. If the FX swap or repo bridges were to collapse just when the swap line is constrained, politicized or weaponized – the current White House makes that scenario less unthinkable than it once was – the only outcome is massive, rapid and increasingly fire-sale dollar deleveraging by European banks and emergency central bank intervention to avoid dollar defaults that would amount to banking Armageddon.
Eurozone banks don’t just use dollars to fund their balance sheets; they are major net providers of dollar liquidity to Eurozone non‑banks, i.e., corporates, hedge funds and institutional asset managers. The ECB estimates Eurozone banks' US dollar lending to those clients and counterparties at close to €700 billion equivalent.
A sudden withdrawal of that liquidity would ripple immediately into trade credit, commodity financing and leveraged investment strategies across Europe, transmitting a financial markets shock directly into the real economy at speed.
Time to worry.
