The European Banking Authority (EBA) released an analysis of EU and European Economic Area bank funding structure and dependence of asset and liability exposures in foreign currency.
Unsecured wholesale and repo funding represent more than 75% of funding denominated in all foreign currencies. On a yearly basis until December 2024, the share of US dollar funding increased the most for repo and unsecured wholesale funding, reaching 28% for repo funding and 18.3% for unsecured wholesale funding.
Unsecured wholesale funding – including unsecured debt securities issued by EU banks – is the main source of foreign currency funding (67% of total foreign currency funding), followed by securities financing transactions (SFTs, or repo funding, 15%), sight deposits (5%) and covered bonds (4%).
The individual reporting data shows a lower US dollar funding reliance in repos, ABS and retail funding. This indicates that EU/EEA banks use the subsidiaries for obtaining repo funding and retail funding denominated in foreign currencies.
Currency mismatch
At the aggregate consolidated level, and considering all foreign currencies, one-third of EU/EEA banks’ total assets are denominated in foreign currencies. In contrast, only one-fifth of their total liabilities are denominated in foreign currencies, which at the aggregate level points to a rather meaningful currency mismatch. However, the aggregate mismatch is lower in the USD (5.6%).
“All in all, even if the regulation does not strictly require banks to match their foreign currency asset and liabilities one-to-one, at the individual institution level attention needs to be paid to any significant currency gaps in the stable funding requirements unless these are adequately hedged,” the EBA wrote.