‘brace Yourself For A Dollar Shock’: Ecb Tells Eurozone Banks To Beef Up Defences

Europe’s biggest banks person conscionable been handed a clear informing from nan European Central Bank: don’t presume nan US dollar will enactment calm – and make judge you’ve sewage nan rate to header if it doesn’t.

The connection appears successful nan ECB’s latest Financial Stability Review, and while these twice-yearly reports are usually packed pinch cautious language, this 1 doesn’t propulsion galore punches. With nan dollar becoming much unpredictable – acknowledgment successful portion to governmental turbulence astir Donald Trump and unit connected nan Federal Reserve – nan ECB says immoderate eurozone lenders request to fortify their buffers now, not later.

Why nan ECB is tense astir nan dollar

The ECB has been dropping hints for months, urging banks to support an oculus connected their dollar vulnerability arsenic world markets wobble. But this clip nan reside has changed. The Review warns that banks moving ample dollar businesses whitethorn request other superior and liquidity to thrust retired immoderate bout of volatility.

In plain English: if nan dollar marketplace tightens unexpectedly, these banks should beryllium capable to support lending, support trading and support functioning – moreover if backing dries up elsewhere.

The ECB says banks should clasp much liquid US-dollar assets truthful they tin plug immoderate abrupt backing gaps and enactment arsenic “stabilisers” if markets get jumpy. That matters because eurozone banks trust heavy connected repos and FX swaps to entree dollars. If those pipes get clogged, nan compression tin hap fast.

The nightmare script nary 1 wants to mention

The study avoids pronunciation retired what a “severe accent scenario” would look for illustration – but financial insiders person been whispering 1 anticipation for months:
what if nan Federal Reserve trim disconnected nan ECB’s emergency dollar switch line?

That back-up channel, created during nan 2008 crisis, gives nan ECB entree to US dollars erstwhile world markets freeze. Losing it would beryllium a awesome shock, forcing banks to scramble for rate astatine precisely nan incorrect moment.

Some cardinal slope officials, Reuters reports, person moreover floated nan thought of pooling dollar and golden reserves extracurricular nan US arsenic a contingency plan.

Still, ECB Vice-President Luis de Guindos tried to cool nan speculation, telling reporters there’s “no indication” nan Fed plans to alteration anything. New York Fed President John Williams has fixed akin reassurances.

The banks astir exposed to a Dollar crunch

Dollar-heavy operations successful nan eurozone are concentrated successful a fistful of financial giants:

• BNP Paribas
• Deutsche Bank
• Crédit Agricole
• Groupe BPCE
• ING
• Banco Santander
• Société Générale

These banks get dollars connected US markets to finance hedge costs and different clients, and they waste FX swaps to European insurers and corporates hedging their dollar risks. To offset this, banks often return nan other position pinch world lenders — deals that don’t ever look intelligibly connected equilibrium sheets and tin go difficult to renew erstwhile markets are stressed.

By nan extremity of past year, eurozone banks held €681 cardinal successful dollar securities and had issued €712 cardinal successful dollar loans, according to ECB figures.

The cardinal slope insists nan mismatch betwixt dollar assets and liabilities is still “limited.” But it besides warns that moreover nan champion liquidity strategies “do not afloat destruct risk.”

Which, translated from central-bank language, means:
if nan dollar marketplace freezes, immoderate banks could consciousness nan daze very quickly.