A large portion of lower-quality assets such as those related to subprime loans were held by European financial institutions, and even today these institutions face the challenge of dealing with these legacy assets. The second vulnerability is their heavy reliance on wholesale dollar funding.
A distinctive feature of European financial institutions has been their relatively high loan-to-deposit ratio, compared with their Japanese and U.S. counterparts. Consequently, in expanding their balance sheets, European financial institutions have become increasingly reliant on marketfunded liquidity.