European banks face a US dollar “funding gap” of almost $2 trillion as a result of aggressive expansion around the world and may have difficulties rolling over debts, according to a report by the Bank for International Settlements. The BIS says European and British banks have relied on an “unstable” source of funding, borrowing in their local currencies to finance long positions in US dollars.
British banks have borrowed some $800bn in sterling to make dollar investments and loans. By mid-2007 they had accumulated what amounted to a $300bn net “short position” on the US dollar. The latest BIS data up to the third quarter of 2008 shows that this exposure has been reduced but it still largely hanging over the UK financial institutions.
Swiss banks had a funding gap of $300bn at the onset of the credit crunch, an extremely high figure relative to Swiss GDP. German banks were $300bn short, and Dutch banks were $150bn short. Belgian and French banks were neutral.
The BIS said the total “funding gap” in dollars was around $2.2 trillion at the peak, when money market liabilities are included. This had fallen to around $2 trillion by the time of the Lehman Brothers collapse.