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

After the crisis, central banks established standing swap lines among major central banks. Which statement best describes how these lines address dollar shortages and what vulnerability remains?

The Fed supplies dollars to partner central banks, which on-lend to their domestic banks, but institutions in countries outside the network or without eligible collateral stay exposed. The lines ease dollar stress without removing it, and cross-currency basis deviations can still recur.

  1. AThe Fed lends dollars to foreign central banks, which on-lend to their banks, but banks outside the swap network or lacking eligible collateral remain exposedCorrect
  2. BThe Fed lends directly to all foreign banks against local currency collateral, removing any shortage
  3. CThe swap lines eliminate FX swap basis deviations permanently
  4. DThe swap lines are used only to support domestic-currency deposits

Explanation

Swap lines provide dollars to partner central banks, which distribute them to local banks. Coverage is limited to certain central banks, and the intermediaries need eligible collateral. Basis deviations can still appear, so the claim of permanent elimination is wrong.

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