ECB Tightens Grip on Bank Liquidity, Fed Collaboration Crucial

In the ever-evolving landscape of global finance, the European Central Bank (ECB) has taken a significant step to bolster the resilience of the European banking system. Starting from September 2025, banks will be required to provide weekly liquidity data, a move that underscores the ECB's commitment to vigilant oversight in the face of rising interest rates and geopolitical uncertainties. This proactive approach is not just about data collection; it's about fortifying the financial system against potential shocks.



The decision to increase the frequency of liquidity data collection comes at a critical juncture. Andrea Enria, the ECB supervisory chief, has highlighted the "delicate phase" that financial markets are currently in, exacerbated by the Ukrainian war, higher inflation, and fast-rising interest rates. These factors can increase liquidity and funding risks, making it imperative for the ECB to have fresher data to better monitor and manage these risks.

By collecting liquidity data on a weekly basis, the ECB can carry out more frequent checks on banks' ability to withstand potential shocks. This increased frequency allows the ECB to identify and address liquidity issues more promptly, thereby enhancing the overall stability and resilience of the European banking system. The ECB's stress tests, which are expected to show that European lenders can face a potential financial crisis from a stronger footing with higher capital levels and more solid assets, will also benefit from this more frequent data collection. This proactive approach ensures that the ECB can take timely actions to mitigate risks and maintain the health of the banking system in the face of rising interest rates and geopolitical uncertainties.

The ECB's collaboration with the Fed on dollar funding backstops is another critical aspect of financial stability. The Fed has historically provided dollar funding to the ECB and other major counterparts in times of market stress, which has been a bedrock of financial stability. For instance, in 2023, the Fed provided tens of billions of dollars to the Swiss central bank, which in turn enabled Credit Suisse to meet client demand for cash, helping to avert a potential financial implosion. This support is particularly important because the U.S. dollar is the dominant currency for economic trade and capital flows, and in times of stress, investors, companies, and financial institutions rush to the safety of the world's reserve currency.

However, some European central banking and supervisory officials have expressed doubts about whether they can still rely on the Fed to provide dollar funding in times of market stress. This uncertainty stems from the Trump administration's policies, which have shaken European officials' trust in the U.S. government. For example, President Donald Trump's endorsement of Russia's position on Ukraine and the imposition of tariffs on U.S. allies have raised questions about U.S. commitment to European security and economic stability. As a result, European officials have held informal discussions about the possibility of the U.S. government pressuring the Fed to suspend the dollar backstops, although they consider it highly unlikely that the Fed would not honor its funding backstops.

The potential changes in U.S. policies could significantly affect the relationship between the ECB and the Fed. If the U.S. government were to pressure the Fed to suspend the dollar backstops, it would have profound ramifications for global markets, financial stability, and the economy. European officials have been gaming out scenarios under which the U.S. government might pressure the Fed to suspend the dollar backstops, and they have discussed whether they can find alternatives to the U.S. central bank. However, the takeaway from these discussions is that there is no good substitute to the Fed, as the Fed is an independent institution accountable to Congress and has never suggested that it would not stand behind its backstops.

In summary, the ECB's collaboration with the Fed on dollar funding backstops is essential for the financial stability of the euro area. Potential changes in U.S. policies could affect this relationship, but European officials consider it highly unlikely that the Fed would not honor its funding backstops. The discussions about finding alternatives to the Fed highlight the importance of the Fed's role in providing dollar funding in times of market stress.

The ECB's increased frequency of liquidity data collection and its collaboration with the Fed on dollar funding backstops are crucial steps in ensuring the financial stability of the euro area. These measures underscore the ECB's commitment to vigilant oversight and proactive risk management, which are essential in the face of rising interest rates and geopolitical uncertainties. The ECB's actions serve as a reminder that financial stability is not just about data collection and stress tests; it's about building a resilient system that can withstand shocks and ensure the health of the banking system.