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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 holds large USD-denominated loans and securities but has few USD retail deposits. It funds the gap by borrowing euros and swapping them into dollars through short-dated FX swaps. Which risk is most directly created by this funding structure?

The main risk is rollover (refinancing) risk. Long-dated dollar assets are funded with short-term synthetic dollars from FX swaps, so the bank must renew the swaps repeatedly, and in stress dollars may become unavailable or very expensive.

  1. ARollover risk, because the FX swap must be renewed and dollar access may vanish in stressCorrect
  2. BCredit risk on the underlying USD loans only, which is unaffected by the maturity of the funding
  3. CInterest rate risk on the euro deposits, which the swap fully eliminates
  4. DSettlement risk that disappears once the swap is documented under a master agreement

Explanation

The bank has long-dated USD assets financed by short-term synthetic dollar funding. When the swap matures it must be renewed, and in stress dollar supply can dry up or become costly. The other options either ignore the maturity mismatch or claim risks are eliminated.

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