FRM Part II · FRM Exam Part II · The US Dollar Shortage in Global Banking and the International Policy Response
A European bank holds a large portfolio of long-dated US dollar asset-backed securities. It funds them mainly with short-term dollar wholesale borrowing from US money market funds and with euro funds swapped into dollars. Which feature of this structure best explains why the bank faced a dollar shortage when wholesale funding markets froze in 2007-08?
The shortage arose because the bank financed long-dated dollar assets with short-term dollar wholesale funding and FX swaps that had to be rolled over. When those markets froze, it could not refinance, so the maturity and currency mismatch created acute dollar funding stress.
- AThe bank's dollar assets were mostly held to maturity, so valuation losses were irrelevant to liquidity
- BThe bank had a large dollar deposit base that could not be withdrawn
- CIts dollar assets were long-term while its dollar liabilities were short-term and had to be rolled over, creating a currency and maturity mismatchCorrect
- DThe bank's euro liabilities exceeded its euro assets, creating a euro shortage
Explanation
Non-US banks built large dollar balance sheets without a matching stable retail dollar deposit base. They relied on short-term wholesale dollar funding and FX swaps that needed constant rollover. When those markets froze, the bank could not refinance long-dated dollar assets. The deposit-base option is wrong because such banks lacked stable dollar deposits.
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