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

Which policy development after the 2007-09 crisis is most consistent with improving the international safety net for dollar liquidity?

Converting temporary central bank swap lines among major central banks into standing arrangements best improves the dollar safety net. It gives assurance that dollar liquidity can be provided abroad during stress, reducing the risk of disorderly fire sales. The other options weaken or ignore liquidity support.

  1. AConverting temporary central bank swap lines among major central banks into standing, unlimited arrangementsCorrect
  2. BEliminating the Liquidity Coverage Ratio for internationally active banks
  3. CProhibiting banks from holding foreign currency liabilities
  4. DRestricting the Fed to lending only to US-chartered banks

Explanation

In 2013 the major central banks converted temporary bilateral swap lines into standing arrangements, offering assurance that dollars can be supplied in stress. Removing the LCR or banning foreign currency liabilities would not improve the safety net, and restricting Fed lending would weaken it.

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