FRM Exam Part II · The US Dollar Shortage in Global Banking and the International Policy Response

Origins of the Global US Dollar Funding Shortage

Updated 11 October 2026 · Fact-checked

Non-US banks built large US dollar assets, such as US securities and loans, but had few stable dollar deposits. They funded the gap with short-term wholesale dollars and FX swaps. When those markets froze in 2007-2008, rolling over the debt failed. That was the dollar shortage.

Understand Origins of the Global US Dollar Funding Shortage

Start with a simple fact. Many banks outside the US hold large US dollar assets: US mortgage securities, loans to US and global borrowers, and trade finance. But they have no US retail deposit base. Their customers deposit euros, pounds or Swiss francs, not dollars.

So a non-US bank must find dollars elsewhere. It has three main sources. It can borrow dollars from US money market funds through short-term paper, CDs and repo. It can borrow dollars from other banks in the interbank market. Or it can take domestic currency and convert it using FX swaps (and cross-currency basis swaps): it sells euros spot, buys them back forward, and holds dollars in between.

This created a currency mismatch funded by maturity mismatch. The assets were long-dated dollar assets. The funding was mostly short-term, often overnight to three months. The bank had to roll over its dollar funding constantly. An FX swap also leaves the bank exposed: the forward leg is a dollar obligation that must be settled, and the swap itself must be renewed. Because the swap is off the usual balance sheet view, the dollar liability is easy to miss, and the true size of the dollar gap was larger than the reported on-balance-sheet numbers suggested.

McGuire and von Peter (BIS) showed this using BIS banking statistics. They found that European banks' gross dollar assets grew very large before 2008, and that their net dollar position with non-banks was far from balanced. The key point is that the net funding need was met largely through interbank borrowing and FX swaps, not stable deposits. The size of the gross balance sheet, not only the net position, made the system fragile.

The shortage became acute when confidence fell. US money market funds pulled back from lending to European banks, and interbank lenders hoarded dollars. Banks then competed for FX swap dollars, which pushed up the cost of getting dollars via swaps (the cross-currency basis turned sharply negative). Fire sales of dollar assets were the alternative. Central bank swap lines were the policy response, covered in related topics.

Key formulas to remember

Dollar funding gap: Funding gap = US dollar assets − US dollar liabilities from stable sources (e.g., non-bank deposits and long-term debt); The gap must be met by short-term wholesale dollars or FX swaps. A larger gap means more rollover risk.
Net dollar position: Net USD position = USD assets − USD liabilities (on-balance-sheet); Can look small or zero while gross positions are huge. Gross size drives rollover need, not only the net.
FX swap as dollar funding: Spot: sell home currency, receive USD. Forward: pay USD, receive home currency back at the agreed forward rate; Economically a collateralised dollar loan. Dollars must be repaid at maturity, so it carries rollover risk.
Cross-currency basis (concept): Basis = the spread added to the non-USD leg's rate so the swap is fairly priced; a negative basis means dollars cost more than the CIP-implied rate; Use direction only unless numbers are given: more negative = tighter dollar funding.

How to solve Origins of the Global US Dollar Funding Shortage questions

Use this order for any question on why a dollar shortage arose or how a bank became exposed.

1Identify the bank's dollar assets: US securities, loans, trade finance and so on.
2Identify its dollar funding: stable deposits, long-term debt, short-term wholesale dollars, interbank, and FX swaps.
3Compute or judge the gap: dollar assets minus stable dollar funding. Note it is met by short-term funding.
4Name the two mismatches: currency (home-currency base, dollar assets) and maturity (long assets, short funding).
5Check where the dollars come from: US money market funds, interbank, FX swaps. Note which sources can run.
6Identify the trigger: loss of confidence, funds withdrawing, counterparty fears. Describe the rollover failure.
7State the consequence: higher swap cost (more negative basis), asset fire sales, need for central bank dollars.
8Match the answer to the question: cause, size, or exposure, and use the correct term.

Quickest way: Assets, funding, trigger in 30 seconds

When to use it: Use for conceptual MCQs asking for the cause, the main exposure or the best description of the shortage.

Ask: does the bank have dollar assets but no stable dollar deposits? If yes, expect a shortage.
Ask: is the funding short-term wholesale or FX swaps? That is the rollover exposure.
Eliminate options that say the problem was only a net position, only credit losses, or only a domestic-currency issue.
Pick the option that combines currency mismatch, maturity mismatch and market freeze.

Common mistakes in Origins of the Global US Dollar Funding Shortage

Saying the shortage was caused by a lack of US dollars in the world.
The word shortage suggests a physical scarcity.
Fix: It was a funding access problem: banks could not roll over short-term dollar debt, not an absolute lack of dollars.
Judging risk from the net dollar position only.
A net figure near zero looks safe.
Fix: Look at gross dollar assets and liabilities. Large gross books mean large rollover needs even with a small net.
Ignoring FX swaps because they are off the main balance sheet.
Swaps are not shown as ordinary borrowing.
Fix: Treat an FX swap as a collateralised dollar loan with a repayment date and rollover risk.
Treating it as a US bank problem.
The dollar is the US currency.
Fix: The exposed institutions were mainly non-US banks, especially European banks, without US retail deposits.
Confusing currency mismatch with maturity mismatch.
Both appear together in the same story.
Fix: Currency mismatch: assets in USD, base in another currency. Maturity mismatch: long assets, short funding. Name both when asked.
Reading a more negative basis as cheaper dollars.
Negative sounds like a discount.
Fix: A more negative cross-currency basis means borrowing dollars through swaps is more expensive.

Worked examples

Example 1

A European bank has USD 300 billion of dollar assets. Its stable dollar funding (non-bank deposits and long-term debt) is USD 120 billion. It funds the rest with USD 100 billion of short-term wholesale dollars and the remainder through FX swaps. How large is the FX swap funding, and what is the main risk?

Show the solution

Funding gap = 300 − 120 = USD 180 billion.
Short-term wholesale dollars cover USD 100 billion.
FX swap funding = 180 − 100 = USD 80 billion.
Short-term funding in total = 100 + 80 = USD 180 billion, which must be rolled over repeatedly.
The risk is rollover: if wholesale lenders withdraw and swap dollars become scarce, the bank cannot refinance.

Answer: FX swap funding is USD 80 billion. The main risk is rollover risk from USD 180 billion of short-term dollar funding supporting long-dated dollar assets.

Example 2

Which statement best explains why non-US banks were vulnerable to a dollar funding run in 2008? A) They held too few dollar assets. B) They had large dollar assets funded by short-term wholesale dollars and FX swaps, without a stable dollar deposit base. C) They relied mainly on long-term dollar bonds. D) They had no exposure to US counterparties.

Show the solution

Vulnerability needs both a big dollar balance sheet and unstable funding.
A is wrong: the banks held large dollar assets.
C is wrong: the funding was mostly short-term, not long-term bonds.
D is wrong: US money funds and US assets were central.
B names the asset size, the short-term wholesale and swap funding, and the missing deposit base.

Answer: B

Exam tips

Always name both mismatches: currency and maturity. Examiners reward the exact pairing.
Remember the sources of dollars: money market funds, interbank, FX swaps. Questions often ask which one ran.
Expect an attribution to McGuire and von Peter: large gross dollar books, funded via interbank and FX swaps.
If a stem gives a net position near zero, check gross sizes before calling the bank safe.
Link the shortage to its symptom: a more negative cross-currency basis and a need for central bank swap lines.

Practice questions from The US Dollar Shortage in Global Banking and the International Policy Response

Origins of the Global US Dollar Funding Shortage: frequently asked questions

Why did European banks have a dollar funding shortage in 2008?

They had built large US dollar assets but lacked stable dollar deposits. They relied on short-term wholesale dollars and FX swaps. When US money funds and banks stopped lending, they could not roll over this funding.

What is the non-US banks' dollar funding gap?

It is the part of their dollar assets not covered by stable dollar funding. They fill it with short-term wholesale dollar borrowing and FX swaps. That makes it a rollover risk.

What did McGuire and von Peter show?

Using BIS data, they showed that European banks had very large gross dollar balance sheets and met their dollar needs mainly through interbank borrowing and FX swaps. This explains why the system was fragile even when net positions looked modest.

Is an FX swap a loan?

Economically it works like a collateralised loan. The bank receives dollars now and returns them at maturity against its home currency. It must be renewed or repaid, so it carries rollover risk.