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

A risk manager at a European bank has USD 5 billion of dollar assets funded with USD 4 billion of short-term FX swaps and USD 1 billion of dollar deposits. The home central bank has a standing swap line with the Fed. Which statement best describes how the swap line mitigates, but does not eliminate, the bank's risk?

The swap line reduces rollover risk by giving the bank a route to dollars through its central bank, but the bank must still post eligible collateral, bear any stigma or pricing cost, and manage its own mismatch and credit losses. It is a backstop, not a full hedge.

  1. AIt lowers rollover risk by giving access to dollars via the central bank, but the bank still faces collateral requirements, possible stigma and the need to qualify under the central bank's operationsCorrect
  2. BIt removes all currency mismatch because the bank's assets are converted to euros
  3. CIt guarantees the FX swap counterparties will roll over at no cost
  4. DIt transfers the bank's dollar credit losses to the Federal Reserve

Explanation

The swap line gives eligible banks access to dollar auctions through their central bank, reducing rollover risk. Access requires eligible collateral, and use may carry stigma and a penalty-like price. It does not remove the mismatch, guarantee private rollover or take on credit losses.

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