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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 wants to limit a bank's exposure to dollar funding stress through a currency-specific liquidity measure. Which post-crisis Basel requirement allows the LCR to be monitored in significant currencies such as the US dollar, in addition to the aggregate level?

Monitoring the liquidity coverage ratio separately in each significant currency, such as the US dollar, is the relevant requirement. Liquidity in one currency cannot be assumed to convert freely into another during stress, so an aggregate LCR may hide a dollar shortfall.

  1. AMonitoring the LCR separately in each significant currencyCorrect
  2. BApplying the leverage ratio to dollar assets only
  3. CApplying a countercyclical capital buffer to dollar liabilities
  4. DRequiring dollar assets to be risk-weighted at 100%

Explanation

Basel III's LCR framework requires banks to monitor LCR by significant currency (liabilities over 5% of total) because liquidity in one currency is not freely transferable to another in stress. The other measures do not address currency-specific liquidity.

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