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

Which development is identified as an important trigger that turned the pre-crisis dollar funding dependence into an acute global shortage in 2007-2008?

The shortage became acute when wholesale dollar funding dried up, as interbank markets froze and money market funds pulled back from lending to banks, especially after Lehman's failure. Non-US banks with large dollar balance sheets and no stable dollar deposits could not roll over their funding.

  1. AA sharp increase in US retail deposit rates
  2. BThe drying up of interbank and money market funding, with money market funds retreating from lending to banks, especially after Lehman's failureCorrect
  3. CA sudden rise in Federal Reserve reserve requirements for foreign banks
  4. DA fall in demand for US Treasury securities by central banks

Explanation

As counterparty concerns rose, wholesale dollar funding such as interbank lending and money fund purchases of bank paper shrank, particularly after Lehman failed in September 2008. Banks with large dollar balance sheets but no dollar deposit base could not roll funding.

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