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									                      Europe’s banks face
              a $2 trillion dollar shortage
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.
By Ambrose Evans-Pritchard
Last Updated: 11:41AM GMT 05 Mar 2009

European banks face a US dollar 'funding gap' of almost $2 trillion Photo: AP

The BIS said European and British banks have relied on an “unstable” source of
funding, borrowing in their local currencies to finance “long positions in US dollars”.
Much of this has to be rolled over in short-term debt markets.

“The build-up of large net US dollar positions exposed these banks to funding risk, or
the risk that their funding positions could not be rolled over,” said the BIS.

The report, entitled “US dollar shortage in global banking”, helps explain why there
has been such a frantic scramble for dollars each time the credit crisis takes a turn for
the worse. Many investors have been wrong-footed by the powerful rally in the dollar
against almost all currencies, except the yen.

British banks had accumulated a dollar "funding gap" of $300bn by mid 2007. The
latest BIS data up to the third quarter of 2008 shows that this exposure has been
trimmed by “deleveraging” but it still largely hanging over the UK financial

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. The data is collected with a lag but it
appears that there are still huge dollar liabilities to be covered.

Simon Derrick, currency chief at the Bank of New York Mellon, said the implications
are obvious. “The global bullion of the last eight years was funded on dollar balance
sheets, so the capital destruction we’re seeing leaves banks starved for dollars. Dollar
is clearly going to appreciate a lot further,” he said.

* This article has been updated following reader queries over the complexity of the
banks' "short" and "long" positions in dollars.

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