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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 explains why the dollar shortage in 2008 was largely a problem of the global banking system rather than only of US institutions?

Non-US banks had large short-term dollar liabilities backing dollar assets, but their home central banks could not create dollars, so there was no dollar lender of last resort. This gap made the shortage global until Fed swap lines filled it.

  1. ANon-US banks held large dollar liabilities with short maturities but lacked access to a US lender of last resort for dollarsCorrect
  2. BNon-US banks held no dollar assets so their euro funding was irrelevant
  3. COnly US banks were subject to wholesale funding runs
  4. DForeign central banks could print dollars freely to meet bank demand

Explanation

Non-US banks had accumulated big dollar balance sheets funded short term, yet their home central banks could not create dollars. Thus a dollar lender of last resort gap existed until swap lines were set up. The other statements are false.

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