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

Non-US banks fund US dollar assets using FX swaps, which are off-balance-sheet. Why does this make the currency mismatch harder for authorities to detect from standard statistics?

Because the forward leg of an FX swap creates a future dollar repayment obligation that sits off the balance sheet, standard on-balance-sheet data understate banks' dollar liabilities and rollover needs, hiding the true size of the currency and maturity mismatch.

  1. AThe dollar obligation from the swap's forward leg is not shown as a dollar liability on the balance sheet, so on-balance-sheet data understates dollar funding needsCorrect
  2. BFX swaps are always settled in the home currency, so no dollar need exists
  3. CSwap obligations are reported twice, which overstates dollar liabilities
  4. DFX swaps eliminate maturity mismatches by construction

Explanation

The forward leg of an FX swap creates a future obligation to return dollars that is not recorded as a balance sheet liability. Conventional balance sheet data therefore understate the true dollar debt and the rollover need. The other options misstate how swaps work.

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