Bank of England Asks Lenders to Assess Dependence on US Dollar

The Bank of England reportedly asked some banks to assess their dependence on U.S. dollars and test whether they could handle a U.S. dollar shock.

This move came after European Central Bank supervisors made a similar request of lenders in that central bank’s region, Reuters reported Thursday (July 17).

The requests were touched off by concerns that President Donald Trump’s changes around trade policy and defense signal that there could be changes in other areas, such as the ability of banks to rely on the Federal Reserve to alleviate dollar shortage issues, according to the report.

While it used to be assumed that the Fed would support non-U.S. banks that ran into dollar shortage issues, bank leaders are no longer certain that would be the case, the report said.

Early stress tests found that banks could not withstand a U.S. dollar shock for more than a few days due to the dependence of lenders and the global financial system on the dollar, the report said.

Banks manage liquidity needs across their global networks by exchanging other currencies for dollars, and 90% of the notional value of currency derivatives globally involved the U.S. dollar, per the report.

It was reported July 9 that the Bank of England said global financial markets were still in jeopardy despite easing tariff tensions.

“Risks and uncertainty associated with geopolitical tensions, global fragmentation of trade and financial markets, and pressures on sovereign debt markets are still elevated,” the U.K central bank said at the time.

At the time of that report, the U.S. dollar had depreciated since April’s tariff announcements. That depreciation and a rise in U.S. Treasury yields were noteworthy because in past times of market stress, U.S. Treasury yields tended to fall while the U.S. dollar strengthened.

In March, a European Central Bank official said America’s embrace of cryptocurrency and nonbank finance could backfire.

“Financial crises often originate in the United States and spread to the rest of the world,” Francois Villeroy de Galhau, a member of the bank’s governing council, said. “By encouraging crypto assets and nonbank finance, the American administration is sowing the seeds of future upheavals.”