FRM Part II · FRM Exam Part II · The US Dollar Shortage in Global Banking and the International Policy Response
Which statement best describes a remaining vulnerability in global dollar funding even after post-crisis liquidity regulation of banks?
A key remaining vulnerability is that non-bank institutions outside the US, such as insurers and asset managers, hold dollar assets hedged with FX swaps. This creates large off-balance-sheet dollar obligations that are poorly captured in statistics and regulation, so rollover stress can still emerge.
- ANon-US banks no longer use FX swaps because LCR rules prohibit off-balance-sheet dollar funding
- BNon-bank financial institutions outside the US hold large dollar assets and hedge through FX swaps, creating off-balance-sheet dollar debt that is not captured well in standard bank statistics and regulationCorrect
- CCentral bank swap lines have been abolished, leaving the Federal Reserve unable to supply dollars abroad
- DDollar funding risk has disappeared because all dollar liabilities are now matched by dollar deposits
Explanation
Non-banks such as insurers, pension funds and asset managers outside the US hedge dollar assets via FX swaps and forwards, generating dollar obligations that sit off balance sheet and are less visible and less regulated. The other options are factually false: swap lines were made standing arrangements and banks still use FX swaps.
Did you get it right without looking?
One question tells you little. A timed set on The US Dollar Shortage in Global Banking and the International Policy Response shows your real accuracy, how long you take and where you lose marks.
More The US Dollar Shortage in Global Banking and the International Policy Response questions
- A non-US bank uses FX swaps to turn euro funding into dollars. After the crisis, the cross-currency basis for euro/dollar has stayed persist…
- Following the global financial crisis, covered interest parity deviations in the cross-currency basis became persistently large for several …
- A risk analyst at a European bank reviews 2008 events. Dollar money market funds, a key source of short-term funding, cut exposure to Europe…
- Which development is identified as an important trigger that turned the pre-crisis dollar funding dependence into an acute global shortage i…
- Before 2007, many European banks built large US dollar-denominated asset portfolios (e.g., US structured credit) while having few dollar ret…
- During the crisis, the cost of obtaining dollars through FX swaps rose sharply, with deviations from covered interest parity widening. What …