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

During the crisis, the Federal Reserve established temporary bilateral central bank liquidity swap lines with several foreign central banks. What was the primary mechanism by which these lines relieved the dollar shortage for non-US banks?

The Fed supplied dollars to a foreign central bank in exchange for that bank's currency, and the foreign central bank then lent the dollars to its own banks. This gave non-US banks dollar access without the Fed taking direct credit risk on them.

  1. AThe Fed lent dollars directly to commercial banks outside the United States against foreign collateral
  2. BThe foreign central bank received dollars from the Fed in exchange for its own currency and lent those dollars to banks in its jurisdictionCorrect
  3. CThe Fed purchased foreign banks' dollar assets to remove them from balance sheets
  4. DThe swap lines allowed foreign banks to borrow in their own currency at the Fed's discount window

Explanation

Under the swap lines, the Fed provided dollars to the foreign central bank against its currency at the prevailing exchange rate, and that central bank on-lent the dollars to its local banks. The foreign central bank bore the counterparty credit risk of its banks. Direct lending to foreign banks was not the mechanism.

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