LONDON/MADRID/FRANKFURT:
Some European central banking and supervisory officials are questioning whether they can still rely on the US 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 US central bank itself has given no signals to suggest that.
But the European officials have held informal discussions about this possibility because their trust in the United States government has been shaken by some of the Trump administration’s policies.
Some officials have been gaming out whether they can find alternatives to the US central bank, 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 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 defence against foreign economic or financial trauma spilling over to the US.
One of the sources said the discussions come amid “the potential for less international cooperation on the part of American authorities.”
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.
