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

Before the 2007-09 crisis, many European banks built large US dollar-denominated asset portfolios (such as US mortgage-related securities). According to the reading, how were these dollar assets mainly funded?

European banks mainly funded their dollar assets with short-term wholesale dollar borrowing, including money market funds, and with FX swaps converting domestic currency into dollars. Lacking US retail deposits, they ran a large maturity and currency mismatch, which made them vulnerable when short-term dollar funding dried up.

  1. APrimarily by stable US retail deposits gathered through US branches
  2. BPrimarily by short-term wholesale dollar funding, including money market funds and FX swap marketsCorrect
  3. CPrimarily by long-term dollar bonds with maturities exceeding the assets
  4. DPrimarily by Federal Reserve discount window borrowing

Explanation

Non-US banks lacked large US retail deposit bases, so they relied on short-term wholesale dollar funding and swapping home currency into dollars through FX swaps. This created a maturity and currency mismatch. Long-term bond funding or Fed borrowing was not the main source.

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