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

During a global dollar shortage, which policy response is most directly aimed at easing the FX swap funding stress of non-US banks?

Federal Reserve swap lines with foreign central banks are the direct response. The Fed supplies dollars to those central banks, which lend them to their domestic banks, relieving dollar funding stress and reducing the premium in private FX swap markets.

  1. AFederal Reserve swap lines with foreign central banks, which provide dollars that those central banks lend to their local banksCorrect
  2. BA rise in domestic reserve requirements in the home country
  3. CTightening of home-country capital controls on dollar assets only
  4. DDirect purchases of home equities by the US Treasury

Explanation

Central bank swap lines let the Fed supply dollars to foreign central banks, which on-lend them to local banks, reducing reliance on private swap markets and easing the premium. The other options do not provide dollar liquidity.

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