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

Consider a non-US bank with USD 60 billion of dollar assets, of which USD 40 billion is funded by short-term FX swaps and wholesale funding maturing within three months, and USD 10 billion by stable dollar term debt over one year. The remaining USD 10 billion is dollar-equivalent capital in home currency. If the bank loses access to all short-term dollar funding for the three-month period and holds USD 8 billion of unencumbered liquid dollar assets, what is the minimum dollar funding gap it must cover from central bank swap-line borrowing or asset sales?

The gap is USD 32 billion. The bank loses USD 40 billion of short-term dollar funding that cannot be rolled, and it can offset USD 8 billion with unencumbered liquid dollar assets, leaving USD 32 billion to cover from swap-line borrowing or asset sales.

  1. AUSD 32 billionCorrect
  2. BUSD 40 billion
  3. CUSD 22 billion
  4. DUSD 2 billion

Explanation

The short-term dollar funding that cannot be rolled is USD 40 billion. Subtracting liquid dollar assets of USD 8 billion gives a gap of USD 32 billion. USD 40 billion ignores the liquidity buffer; the term debt and capital do not mature within the window, so they are not subtracted again.

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