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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 2007-2009 crisis, many European banks built large US dollar asset portfolios, such as US mortgage-related securities and dollar loans. Which funding pattern best describes how these banks financed the assets, creating the vulnerability that surfaced in 2008?

Non-US banks financed dollar assets mainly with short-term wholesale dollar funding and FX swaps from home currencies. This left a maturity and currency mismatch with rollover risk, which became severe when wholesale dollar markets froze in 2008.

  1. AReliance on stable US retail deposits gathered through branch networks in the United States
  2. BReliance on short-term wholesale dollar funding, including money market funds, and FX swaps to convert domestic currency into dollarsCorrect
  3. CLong-term dollar bond issuance matched closely to the maturity of the assets
  4. DFunding mainly from equity capital denominated in dollars

Explanation

Non-US banks lacked a large dollar retail deposit base, so they funded dollar assets through short-term wholesale dollar borrowing and by swapping euros or other currencies into dollars. This created a currency and maturity mismatch that was exposed once wholesale markets froze. Matched long-term funding was not the dominant pattern.

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