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

Which statement best describes a limitation of central bank swap lines as a response to global dollar shortages?

Swap lines only reach banks in jurisdictions whose central banks have an arrangement with the Fed, so banks elsewhere remain exposed to dollar funding stress. They also do not remove banks' own duty to manage dollar liquidity, and the Fed carries no exchange-rate risk because swaps reverse at the original rate.

  1. AThey are available to any central bank worldwide regardless of relationship with the Fed
  2. BAccess is limited to a set of counterparty central banks, so banks in jurisdictions without a line remain exposed to dollar funding stressCorrect
  3. CThey eliminate the need for banks to manage dollar liquidity risk
  4. DThey expose the Fed to exchange rate losses when the dollar appreciates

Explanation

Standing lines exist only with a few central banks, and temporary lines were extended to others in crises, so coverage is selective. Banks still must manage dollar liquidity risk, and the Fed bears no exchange rate risk since the swap reverses at the initial rate.

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