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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 the post-crisis international policy response that addresses dollar shortages for non-US banks?

Standing central bank swap lines are the answer. Foreign central banks obtain dollars from the Federal Reserve against their own currency and lend them to domestic banks against local collateral. The Fed does not lend directly to foreign banks, and neither the IMF nor Basel III plays that role.

  1. ACentral banks established standing swap lines with the Federal Reserve, allowing them to lend dollars to their domestic banks against local collateralCorrect
  2. BThe Federal Reserve lends dollars directly to foreign commercial banks without involving their central banks
  3. CThe IMF is obliged to supply dollars to commercial banks during any funding stress
  4. DBasel III bars non-US banks from holding dollar liabilities

Explanation

Fed swap lines give foreign central banks dollars in exchange for local currency, and those central banks on-lend to their banks. The Fed does not deal with the foreign banks directly, the IMF does not lend to commercial banks, and Basel III imposes no such ban. The swap lines were made standing in 2013 among major central banks.

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