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

A regulator compares two non-US banks with identical dollar assets of USD 100 billion. Bank X funds them with USD 40 billion of dollar deposits and USD 60 billion of one-month FX swap-based borrowing, rolled monthly. Bank Y funds them with USD 40 billion of dollar deposits, USD 20 billion of one-month FX swaps and USD 40 billion of three-year dollar bonds. If the cross-currency basis widens sharply and swap markets seize for a month, which conclusion is best supported?

Bank X has three times the rollover exposure. It must refinance USD 60 billion of swap funding within the month, 60% of assets, versus USD 20 billion or 20% for Bank Y, whose three-year bonds do not mature. Bank X is more likely to face forced asset sales or central bank reliance.

  1. ABank X must refinance 60% of dollar assets versus 20% for Bank Y, so Bank X has three times the rollover exposure and larger risk of forced asset sales or central bank relianceCorrect
  2. BBoth banks have the same rollover exposure because total dollar assets are equal
  3. CBank Y has greater rollover exposure because its bonds carry term premiums
  4. DBank X has less exposure because deposits and swaps are both short term

Explanation

Rollover need within the month is the swap borrowing: Bank X USD 60bn (60% of assets) versus Bank Y USD 20bn (20%), a ratio of 3 to 1. Bank Y's three-year bonds do not need refinancing within the month. Equal asset size (the second option) ignores funding composition, which is what drives rollover risk.

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