FRM Part II · FRM Exam Part II · The US Dollar Shortage in Global Banking and the International Policy Response
During the 2008 crisis, a non-US bank with no access to the Federal Reserve's discount window for its dollar needs found interbank dollar funding unavailable. Which policy measure by the Federal Reserve most directly addressed this gap for foreign banks?
The Federal Reserve set up dollar liquidity swap lines with foreign central banks, which exchanged local currency for dollars and lent those dollars to their domestic banks. This gave non-US banks a backstop source of dollar funding that the private market no longer supplied.
- ARaising the US federal funds target rate to attract dollar deposits
- BEstablishing central bank dollar liquidity swap lines with foreign central banks, which then lent dollars to their domestic banksCorrect
- CPurchasing euro-denominated bonds in the open market
- DImposing capital controls on dollar outflows from the United States
Explanation
The Fed provided dollars to foreign central banks through swap lines in exchange for local currency, and those central banks on-lent dollars to their banks. Raising rates would not supply dollars, and the other options do not deliver dollar liquidity to foreign banks.
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