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

Why did the dollar shortage during the crisis spill over to banks and economies outside the United States even though the US Federal Reserve was easing domestic policy?

Foreign banks held large dollar assets and depended on wholesale and swap markets for dollars, which seized up. US domestic easing did not directly supply those banks, so the dollar shortage spread globally and prompted the Fed to set up central bank swap lines.

  1. AForeign banks held mostly yen assets and had no dollar exposure
  2. BForeign central banks were prohibited from holding dollars
  3. CThe US dollar's role in global funding meant that foreign banks with dollar assets needed dollars from markets that had seized up, and domestic easing did not directly supply themCorrect
  4. DThe Fed's easing eliminated all cross-border dollar lending

Explanation

Dollar funding is needed globally because of the dollar's dominant role in banking and trade. Foreign banks with large dollar assets could not access dollars when wholesale and swap markets seized. Domestic US easing did not directly reach them, which motivated central bank swap lines.

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