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

Why are FX swap obligations a particular concern for assessing a bank's currency mismatch, compared with on-balance-sheet liabilities?

FX swaps are often kept off balance sheet or under-captured in statistics, so they hide an obligation to deliver dollars at maturity. This leads to understated dollar funding gaps and currency mismatches, making rollover vulnerabilities harder for banks and supervisors to see.

  1. AThey are recorded as fully visible dollar borrowings on the balance sheet
  2. BThey have no principal exchange at maturity
  3. CThey are off-balance-sheet or under-reported in many statistics, so dollar funding gaps can be understated even though a future dollar repayment is owedCorrect
  4. DThey are guaranteed by central banks in all conditions

Explanation

FX swaps are often not shown as debt on the balance sheet, hiding the future obligation to return dollars. This understates the currency mismatch and rollover need. They do involve principal exchange at maturity and carry no automatic central bank guarantee.

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