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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 Japanese bank explains why the bank's dollar funding gap cannot be seen simply by looking at its consolidated balance sheet. Which statement best captures the reason, consistent with the analysis of the global dollar shortage?

Banks raise dollars synthetically by swapping domestic currency into dollars, and these FX swap obligations sit off balance sheet. As a result, consolidated balance sheets understate the true dollar debt and rollover needs, hiding the size of the dollar funding gap.

  1. ADollar assets are always fully hedged with dollar equity
  2. BBanks use FX swaps to convert domestic currency into dollars, and these off-balance-sheet obligations hide the true size of the dollar liabilitiesCorrect
  3. CDollar funding gaps arise only from derivatives margin and not from loans
  4. DConsolidated balance sheets exclude all foreign currency assets

Explanation

FX swaps are treated as off-balance-sheet, so the dollar obligation to return at maturity does not appear as debt. The consolidated balance sheet therefore understates dollar leverage and the rollover need. Option A is wrong because dollar assets are not funded by equity in this way.

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