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.