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

A non-US bank has USD 60 billion of dollar assets, funded by USD 20 billion of direct dollar liabilities and USD 40 billion of FX swap borrowing, 75% of which matures within 1 week. Dollar funding is otherwise unavailable and the bank has USD 5 billion of unencumbered dollar HQLA. In a stress where no swaps roll over, what is the 1-week dollar shortfall, and which policy tool best addresses the residual gap?

The shortfall is USD 25 billion: 75% of the 40 billion swaps is 30 billion maturing in a week, less 5 billion of dollar liquid assets. Since the gap is in dollars, central bank swap lines supplying dollars are the appropriate policy response.

  1. AUSD 25 billion shortfall; a central bank swap line allowing the home central bank to provide dollarsCorrect
  2. BUSD 30 billion shortfall; raising the bank's euro capital ratio
  3. CUSD 35 billion shortfall; a euro-denominated lender of last resort
  4. DUSD 25 billion shortfall; a rule banning FX swaps

Explanation

One-week maturities are 75% of 40 = 30 billion. Subtract 5 billion HQLA to get 25 billion. Choosing 30 ignores the HQLA buffer. The gap is in dollars, so central bank dollar swap lines are the relevant tool, while euro support cannot create dollars.

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