Fed worries US banks could catch Euro fever

The US Federal Reserve is taking a closer look at the US units of Europe's biggest banks, concerned that a eurozone debt crisis could spill into the US banking system, the Wall Street Journal reported on Thursday. Is the contagion spreading?

The US Federal Reserve is taking a closer look at the US units of Europe's biggest banks, concerned that a eurozone debt crisis could spill into the US banking system, the Wall Street Journal reported on Thursday.

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The $2.5-trillion US money market funds industry - which supplies short-term dollar funding to banks - has retreated from the eurozone recently, concerned that the continent's debt crisis is spiralling out of control.

That and the drying up of interbank lending has led to a trebling of dollar funding costs for eurozone banks in the last month. One bank was forced to borrow dollars at the European Central Bank on Wednesday.

In a dramatic shift, the US branches of foreign banks became net borrowers of dollars from their overseas affiliates for the first time in a decade, Fed data showed.

The Fed's New York branch - which oversees US units from many European banks - is now asking for more information about whether the banks have reliable access to the funds needed to operate in the US, the report said.

New York Fed officials "are very concerned" about European banks facing funding difficulties in the US, said a senior executive at a major European bank who has participated in the talks.

The New York Fed was not available to comment.

On Wednesday, one eurozone bank borrowed $500 million from the European Central Bank at a rate much above those at which banks can get dollars in the open market. It was the first time since February 23 a bank used the central bank's facility.

Fed officials recently have held meetings with US-based executives from top European banks to discuss their funding positions.

Regulators are trying to guard against the possibility European banks that encounter trouble could siphon funds out of their US arms.