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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 funding squeeze, a non-US bank with large US dollar assets finds that private markets for dollar funding have become very expensive. Which official-sector arrangement is designed to relieve this pressure by allowing the bank's home central bank to obtain dollars and lend them to domestic banks?

A bilateral central bank liquidity swap line with the Federal Reserve is the correct choice. It lets the home central bank obtain US dollars against its own currency and lend them to local banks, directly addressing the dollar shortage, which domestic-currency measures cannot do.

  1. AA bilateral central bank liquidity swap line with the Federal ReserveCorrect
  2. BAn increase in the home country's domestic reserve requirement ratio
  3. CA purchase of domestic government bonds by the home central bank paid in local currency
  4. DA rise in the home central bank's domestic policy rate

Explanation

In a swap line the foreign central bank exchanges its own currency for US dollars with the Federal Reserve and on-lends those dollars to its banks. Domestic-currency measures such as bond purchases, rate changes or reserve requirements do not supply dollars to banks that have dollar liabilities.

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