1 Dec 2011

European Banks short on Dollar Funding?

This problem is just another aspect of the disconnect between the two sides of bank's balance sheets. Like mismatched maturities the mismatch between the currencies is as serious a problem and should be addressed by banking regulators without delay. If banks want to extend loans in a certain currency they should have ensured that they have access to funding in that currency for the period of the loan. Relying on the foreign exchange and interbank funding market for the bulk of the funding is highly risky. There might be short-term adjustments to the balance sheet as deposits are received or withdrawn but the wholesale funding should only be for a small percentage of outstanding commitments.

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