Eurozone Banks Brace for Dollar Liquidity Shock

Euro zone banks with major dollar operations are advised by the European Central Bank to increase liquidity and capital reserves amid potential U.S. dollar volatility. President Trump's actions have increased currency uncertainty, prompting the ECB's Financial Stability Review to underscore preparedness in large euro zone banks.

Euro zone banks with significant operations in U.S. dollars are urged by the European Central Bank (ECB) to fortify their liquidity and capital buffers in anticipation of currency volatility. The guidance follows U.S. President Donald Trump's policy actions, which have heightened uncertainty around the dollar's stability, as detailed in the ECB's Financial Stability Review.

The ECB emphasized the need for banks to bolster their capital in anticipation of increased currency volatility and counterparty credit risk. These institutions are encouraged to hold liquid U.S. dollar assets to counterbalance potential outflows and support financial stability. The review also highlighted concerns about inflated stock market values, the rise of stablecoins, and high debt levels.

Despite reassurance from ECB Vice President Luis de Guindos about current swap lines, the ECB is preparing for scenarios that could challenge banks' ability to maintain liquidity via repos and FX swaps. Presently, euro zone banks have a large presence in dollar markets, totaling 681 billion euros in dollar securities and 712 billion euros lent in dollar terms by the end of last year.

(With inputs from agencies.)