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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 global financial crisis, which development most directly increased non-US banks' demand for dollars, contributing to the later shortage?

Non-US banks built up large dollar-denominated securities and loan portfolios outside the United States before the crisis and financed them through wholesale markets and swaps rather than stable deposits. That raised their dollar needs and rollover risk, setting the stage for the shortage.

  1. AAcquisition of large amounts of US dollar-denominated securities and loans outside the US, financed in wholesale marketsCorrect
  2. BA decline in cross-border banking activity
  3. CA rise in dollar retail deposits at European banks
  4. DCentral banks stopping the use of dollars as reserves

Explanation

Non-US banks expanded dollar assets, including US structured products and dollar lending abroad, rapidly in the 2000s. They funded these through wholesale markets and swaps rather than stable deposits. That raised dollar demand and rollover risk. The other options contradict the facts.

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