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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 with large dollar assets funds them mainly with short-term wholesale dollar borrowing and FX swaps rather than a stable US dollar deposit base. Which vulnerability identified in the post-crisis analysis of global banking does this best illustrate?

This illustrates a maturity and currency mismatch that depends on continued dollar rollover funding. Funding long-term dollar assets with short-term wholesale dollar borrowing and FX swaps leaves the bank exposed to a dollar shortage whenever markets stop rolling that funding.

  1. AMaturity and currency mismatch that depends on continued access to dollar rollover fundingCorrect
  2. BExcess holdings of domestic currency high-quality liquid assets
  3. CCredit risk from a concentrated domestic retail deposit base
  4. DInterest rate risk arising from fixed-rate domestic mortgage lending

Explanation

Banks funding long-term dollar assets with short-term dollar wholesale funding and FX swaps must keep rolling over that funding. If markets seize up, they face a dollar shortage. The other options describe risks unrelated to dollar rollover dependence.

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