Eurodollar University HOLY SH*T: Europe’s Banks Are Acting Like It’s 2020 Again
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Jan 3, 2026 European banks are experiencing a shocking surge in lending to shadow banks, driven by urgent need rather than adventurous risk-taking. This emergency backstop aims to prevent fire sales in troubled financial markets. The trend mirrors past U.S. dollar repo tightness, indicating a broader global funding squeeze. Notably, banks are seeking safety in government bonds while grappling with significant exposure to non-bank financial institutions. The IMF raises alarms over systemic risks, highlighting the interconnected nature of today's financial stresses.
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Europe's Banks Stepped In As Emergency Backstops
- European banks dramatically increased lending to euro-denominated shadow banks in October and November, signaling emergency backstops rather than risk-taking.
- This mirrors U.S. dollar repo tightness and shows funding strains are global, not just a dollar or Fed reserve issue.
Shadow Banks Are Deeply Intertwined With Banks
- Shadow banks grew to fill credit gaps after 2008 by borrowing wholesale and relending, creating interdependence with regulated banks.
- That link creates systemic risk because banks hold lingering exposures and often provide liquidity backstops to avoid fire sales.
October–November Lending Spike Matched 2020 Emergency Patterns
- The ECB reported a 103.6 billion euro surge in October and a 47 billion euro jump in November in loans from MFIs to shadow banks.
- Those two months combined form the largest two-month increase on record and resemble emergency funding patterns from Feb–Mar 2020.