Some European central banking and supervisory officials are questioning the reliability of the U.S. Federal Reserve in providing dollar funding during market stress, which raises concerns about a key pillar of financial stability. Despite the sources expressing skepticism, they believe it is unlikely that the Fed would fail to honor its funding commitments, and the central bank itself has not indicated otherwise.
However, informal discussions among European officials have taken place, reflecting a loss of trust in the U.S. government influenced by the Trump administration's policies. President Trump’s sharp departure from long-standing U.S. policy, particularly regarding international relations and economic practices, has led to apprehension.
In forums assessing risks to the financial system, officials have explored scenarios where the U.S. government might compel the Fed to suspend dollar backstops. Consequently, some officials are considering alternatives to the Fed, which has historically provided European counterparts like the European Central Bank with access to dollar funding during market turbulence.
The consensus from these discussions is that there is no viable substitute for the Fed, as shared by six sources, including senior ECB and European Union banking supervisory staff. These sources spoke anonymously to discuss sensitive deliberations.
Though the ECB and the Fed declined to comment, the Fed remains an independent institution accountable to Congress, and it has consistently indicated its commitment to maintaining its backstops to protect against international economic upheaval.
Moreover, five senior euro zone central bank officials stated that these informal discussions were not influenced by any directives from the Fed or ECB leadership. The matter has recently been reviewed in working groups involving senior European banking officials and is expected to arise in upcoming formal discussions.
Concerns about potential reduced international cooperation from U.S. authorities also surfaced. During a European Parliament hearing on U.S. protectionism and its implications for the European economy, ECB President Christine Lagarde noted that the relationship with the Fed remains unchanged since Trump took office.
As the central bank responsible for the 20 euro zone countries, the ECB sets monetary policy and enhances the financial system's resilience while also supervising major regional banks. The conversations about alternative funding sources form part of ongoing evaluations of vulnerabilities within the euro zone’s financial system.
The U.S. dollar remains the dominant currency for trade and capital flows. In times of financial stress, entities seek the security of this reserve currency. Most recently, the Fed provided substantial funds to the Swiss central bank, enabling it to meet demands from Credit Suisse clients. While Credit Suisse ultimately required a rescue, the Fed's actions helped prevent a potential systemic crisis.
Despite the expressed doubts among banking officials, most see the likelihood of the Fed curtailing its financing lines as remote. Such an action would have significant consequences for global markets and the U.S. economy, potentially undermining the dollar's dominance and diminishing demand for U.S. government debt.
Though the Fed's independence is acknowledged, four of the six sources indicated that some European officials worry that the Trump administration may escalate pressure on the Fed, leading to scenarios where dollar funding is not provided. EU officials are particularly concerned about the reliance of European banks on short-term dollar borrowings, emphasizing the need for continued access to Fed credit lines, as approximately 17% of euro-zone banks' funding is in dollars, according to a recent ECB study.