Euro zone lenders may come under pressure if access to U.S. dollar funding tightens, potentially forcing them to scale back lending to businesses and households, Philip Lane, Chief Economist of the European Central Bank, cautioned on Tuesday.
Lane highlighted that the combination of sizeable off-balance sheet exposures in U.S. dollars and unstable funding channels leaves banks exposed to shifts in market conditions.
“The combined presence of substantial USD-denominated off-balance sheet exposures and volatile funding means that sudden changes in these net exposures cannot be ruled out,” Lane said.
He further warned that if the probability of such a scenario increased, it would “generate pressures on both sides of banks’ balance sheets and potentially downward pressure on on-balance sheet exposures like loans to the real economy.”
The remarks underscore growing concerns about financial stability in the euro area in the event of a U.S. dollar funding squeeze, which could ripple through credit markets and weigh on economic activity.
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