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

In the build-up to the 2008 crisis, non-US banks expanded their dollar balance sheets rapidly. Which statement best describes how they typically financed the gap between their dollar assets and their dollar deposits?

Non-US banks mainly filled their dollar funding gap with short-term wholesale dollar borrowing and by swapping domestic currency into dollars through FX and cross-currency swaps. These sources needed constant rollover, which made the banks highly exposed when dollar markets seized up.

  1. ABy borrowing dollars from the Federal Reserve discount window as a routine source of funding
  2. BBy issuing long-term dollar bonds that matched the asset maturities
  3. CBy using short-term wholesale dollar markets and swapping domestic currency into dollars through FX swapsCorrect
  4. DBy selling their dollar assets to domestic central banks every quarter

Explanation

Non-US banks lacked large dollar retail deposit bases, so they raised dollars from money markets and converted domestic currency via FX swaps and cross-currency swaps. This short-term funding had to be rolled over continuously. Long-term matched funding was not the dominant practice, and routine discount window use was not a funding plan.

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