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

Post-Crisis Regulation and Remaining Dollar Funding Vulnerabilities

Updated 11 October 2026 · Fact-checked

After the 2007-2009 crisis, Basel III added the LCR and NSFR. Banks must also monitor these ratios in each significant currency, such as USD. This limits currency mismatch, but non-US banks still depend on FX swaps for dollars, so a dollar shortage can return. Solve questions by finding the currency, the gap and the policy limit.

Understand Post-Crisis Regulation and Remaining Vulnerabilities

Before the crisis, many non-US banks held large dollar assets. They funded them with short-term dollar wholesale money and FX swaps, not with stable dollar deposits. When dollar markets froze, they could not roll that funding. Central banks had to step in with swap lines.

Basel III answered with two liquidity standards. The Liquidity Coverage Ratio (LCR) requires enough high-quality liquid assets (HQLA) to cover net cash outflows over a 30-day stress period. The Net Stable Funding Ratio (NSFR) requires available stable funding to cover required stable funding over one year. Both must be at least 100% in the Basel standard.

The currency point matters. The LCR and NSFR are set in a common currency for the whole bank. A bank could meet them in total while holding yen or euro HQLA against dollar outflows. So Basel asks banks to also monitor the LCR in each significant currency. This is a currency in which the bank's liabilities are 5% or more of total liabilities. Banks should also monitor the NSFR by currency. Basel does not set a separate binding minimum for these currency ratios. It is a monitoring tool, and supervisors may add limits.

Vulnerabilities remain. Banks outside the US still need dollars for lending, trade and securities. They fill the gap with FX swaps and cross-currency basis swaps, which are off balance sheet and roll over often. HQLA held in other currencies can only be turned into dollars through FX markets, which may fail under stress. Central bank swap lines are a backstop, not a regulatory requirement, and they depend on policy choices.

Remaining challenges include limited data on off-balance-sheet FX funding, quarter-end and year-end pressure in swap markets, non-bank dollar borrowers outside bank regulation, and a moral hazard risk if banks count on central bank support.

Key formulas to remember

Liquidity Coverage Ratio: LCR = Stock of HQLA ÷ Total net cash outflows over the next 30 days ≥ 100%; Net outflows = outflows − min(inflows, 75% of outflows). Inflows are capped at 75% of outflows.
Net Stable Funding Ratio: NSFR = Available stable funding (ASF) ÷ Required stable funding (RSF) ≥ 100%; Horizon is one year. ASF weights liabilities and capital by stability. RSF weights assets and off-balance-sheet items by liquidity and maturity.
Currency-specific LCR: LCR(USD) = USD HQLA ÷ USD net cash outflows over 30 days; Monitored for each significant currency. Significant means liabilities in that currency are 5% or more of total liabilities. It is a monitoring metric, not a separate Basel minimum.
Dollar funding gap: Gap = USD assets − USD stable funding (e.g. USD deposits and long-term USD debt); The gap must be filled with short-term wholesale USD or FX swaps. This is the core vulnerability.

How to solve Post-Crisis Regulation and Remaining Vulnerabilities questions

Use this order for any question on currency liquidity rules and dollar vulnerabilities.

1Identify what is asked: the ratio (LCR or NSFR), the currency scope, or a policy and vulnerability judgement.
2Check the currency. Is it a significant currency with liabilities at 5% or more of total liabilities? If yes, Basel expects monitoring in that currency.
3For a calculation, separate the currency's HQLA and outflows. Apply the 75% cap on inflows to get net outflows.
4Compute the ratio and compare with 100%. Note that the 100% is the whole-bank standard, not a binding currency minimum.
5Ask how a shortfall would be closed. If through FX swaps, note the rollover and basis risk.
6State the residual vulnerability: FX swap dependence, off-balance-sheet funding, and reliance on central bank swap lines.
7Pick the answer that is precise about monitoring versus a binding requirement.

Quickest way: Currency, ratio, backstop check

When to use it: Use when you have about a minute and the options mix regulation and vulnerability statements.

Underline the currency in the question stem.
Eliminate options that call the currency LCR a binding Basel minimum.
Eliminate options that say the rules removed dollar dependence.
For numbers, do HQLA ÷ (outflows − min(inflows, 0.75 × outflows)) and compare with 1.
Choose the option naming FX swap rollover or swap-line dependence as the remaining risk.

Common mistakes in Post-Crisis Regulation and Remaining Vulnerabilities

Saying Basel sets a binding 100% LCR minimum in each currency.
The whole-bank 100% rule is easy to extend by assumption.
Fix: Remember that currency-level LCR is a monitoring requirement for significant currencies. Supervisors may add limits, but Basel does not.
Using total inflows in the LCR denominator without the cap.
Students subtract all inflows from outflows.
Fix: Cap inflows at 75% of outflows. Net outflows are at least 25% of gross outflows.
Mixing the LCR 30-day horizon with the NSFR one-year horizon.
Both ratios use a 100% threshold and similar wording.
Fix: LCR is short-term stress liquidity. NSFR is structural funding over one year.
Assuming euro or yen HQLA covers dollar outflows.
Total HQLA looks large on the balance sheet.
Fix: Currency convertibility fails in stress. Compare HQLA and outflows currency by currency.
Thinking post-crisis rules ended the need for central bank swap lines.
Students treat regulation as a full fix.
Fix: Regulation reduces mismatch but FX swap reliance remains. Swap lines stay an important backstop.

Worked examples

Example 1

A bank has USD HQLA of $18 billion. Over 30 days, USD gross outflows are $40 billion and USD inflows are $34 billion. Compute the USD LCR and interpret it.

Show the solution

Inflow cap = 75% × 40 = $30 billion.
Inflows counted = min(34, 30) = $30 billion.
Net outflows = 40 − 30 = $10 billion.
USD LCR = 18 ÷ 10 = 180%.
180% is above 100%, but this is a monitored currency ratio, not a binding Basel minimum.

Answer: USD LCR = 180%. The bank has ample dollar liquidity on this measure, though supervisors only monitor it by currency.

Example 2

A European bank has USD assets of $90 billion. Its USD deposits and long-term USD debt total $55 billion. The rest is funded by 1-month FX swaps. Which statement is most accurate?

Show the solution

Dollar funding gap = 90 − 55 = $35 billion.
Gap share of USD assets = 35 ÷ 90 ≈ 38.9%.
This gap is financed with euro funding swapped into dollars through short-term FX swaps.
These swaps must be rolled monthly and are exposed to basis widening and market closure.
Meeting an aggregate LCR does not remove this mismatch.

Answer: The bank has a $35 billion dollar funding gap, about 39% of USD assets. It relies on rolling short-term FX swaps, so it stays vulnerable to a dollar shortage even if it meets Basel ratios.

Exam tips

Questions often test the difference between monitoring by currency and a binding minimum. Read the verb carefully.
Always apply the 75% inflow cap before computing LCR. Examiners build it into the numbers.
Link the dollar gap to FX swaps and the cross-currency basis. Say what happens when the basis widens.
If an option says regulation eliminated dollar dependence or central bank backstops, it is almost certainly wrong.
Watch the horizon: 30 days for LCR, one year for NSFR.

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

Post-Crisis Regulation and Remaining Vulnerabilities: frequently asked questions

Does the LCR have to be met separately in US dollars?

Basel requires the LCR to be met in aggregate. It asks banks to monitor the LCR in each significant currency. Some national supervisors add their own currency-level limits.

What counts as a significant currency under Basel?

A currency in which the bank's liabilities are 5% or more of its total liabilities. Banks should monitor LCR and NSFR in these currencies.

Why do dollar funding risks remain after LCR and NSFR?

Non-US banks still fund dollar assets through FX swaps and short-term wholesale funding. These roll often and can freeze in stress. Only central bank swap lines have filled the gap in past crises.

How do I manage foreign currency liquidity risk in a bank?

Measure liquidity by currency, hold HQLA in the currencies of your outflows, and diversify funding sources. Stress test FX swap access and set limits on short-term mismatches. Keep contingency plans that include central bank facilities.