By Elisa Martinuzzi, Jesús Aguado, Balazs Koranyi, Stefania Spezzati and John O’Donnell
(Reuters) – Some European central banking and supervisory officials are questioning whether they can still rely on the U.S. Federal Reserve to provide dollar funding in times of market stress, six people familiar with the matter said, casting some doubt over what has been a bedrock of financial stability.
The sources told Reuters they consider it highly unlikely the Fed would not honour its funding backstops — and the U.S. central bank itself has given no signals to suggest that.
But the European officials have held informal discussions about this possibility – which Reuters is reporting for the first time – because their trust in the United States government has been shaken by some of the Trump administration’s policies.
President Donald Trump has made a sharp break from long-standing U.S. policy in several areas, such as appearing to endorse Russia’s position on Ukraine, raising questions about U.S. commitment to European security and imposing tariffs on its allies.
In some European forums where participants assess potential risks to the financial system, these officials have discussed scenarios under which the U.S. government might pressure the Fed to suspend the dollar backstops, two of the sources said.
Some officials have been gaming out whether they can find alternatives to the U.S. central bank, the two sources said. In times of market stress, the Fed has provided the European Central Bank and other major counterparts with access to dollar funding.
The takeaway from these discussions: there is no good substitute to the Fed, said the six sources, who include senior ECB and European Union banking supervisory staff with first-hand knowledge of the conversations.
The sources all requested anonymity to speak candidly about the private deliberations.
The ECB and the Fed declined to comment for this article. The White House did not respond to a request for comment.
The Fed is an independent institution, accountable to Congress. The central bank has never suggested that it would not stand behind its backstops, which it maintains as a first line of defense against foreign economic or financial trauma spilling over to the U.S.
Separately, five senior euro zone central bank officials said the informal conversations – held outside regular policymaker gatherings – were not driven by any signals from the Fed or from ECB leadership.
One of the sources with direct knowledge of the conversations said the matter has been discussed in recent weeks in working groups that help officials examine issues, and involved senior European central banking and supervisory staff.
Another said the question of whether Europe can rely on the Fed’s backstops is expected to also come up in more formal discussions soon.
One of the sources said the discussions come amid “the potential for less international cooperation on the part of American authorities.”
During a European Parliament hearing on Thursday about the U.S. shift to protectionism and its impact on the European economy, ECB President Christine Lagarde said the relationship with the Fed had not changed since Trump took office in January.
RISK ASSESSMENT
As the central bank for the 20 euro zone countries, the ECB sets monetary policy and is responsible for increasing the financial system’s resilience and identifying potential risks. It also supervises the region’s top banks, which are among the world’s largest.
The discussions about funding alternatives are part of a broader analysis of the vulnerabilities in the euro zone’s financial system, which the ECB and other EU regulators do as a matter of course, the sources said.
The U.S. dollar is the dominant currency for economic trade and capital flows. In times of stress, investors, companies and financial institutions rush to the safety of the world’s reserve currency.
Most recently in 2023, the Fed provided tens of billions of dollars to the Swiss central bank, which in turn enabled Credit Suisse to meet client demand for cash. While Credit Suisse eventually had to be rescued, the Fed helped avert an implosion that could have wrecked the financial system, analysts say.
Despite the doubts expressed by banking officials in private conversations, the possibility the Fed would ever curtail its financing lines is seen by European officials as only a very remote possibility, according to the five eurozone central bank officials, who also spoke to Reuters on condition of anonymity.
That’s because such a move by the Fed would have profound ramifications for global markets, financial stability and the economy. It would also likely ricochet back on the U.S. economy, threaten the dollar’s dominance and depress demand for U.S. government debt, several of the sources said.
While the Fed’s independence is not under question, four of the six sources familiar with the discussions said some European officials felt it was possible that the Trump administration may increase pressure on the central bank over time, leading to the scenario where it doesn’t provide dollar funding.
The Fed declined to comment on that possibility, while the White House did not respond to a request for comment.
One of the sources said EU officials are concerned about European banks’ short-term borrowings in dollars, which make continued access to the Fed’s credit lines vital.
About 17% of euro-zone banks’ funding is in dollars, a recent ECB study showed.
(Reporting by Elisa Martinuzzi, Jesus Aguado, John O’Donnell, Stefania Spezzati, Francesco Canepa and Balazs Koranyi; Editing by Paritosh Bansal and Daniel Flynn)
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