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

Why do FX swaps used to obtain dollars create a currency mismatch that is often not visible on a bank's balance sheet?

The forward leg of the swap commits the bank to repay dollars at maturity, but this obligation is typically off balance sheet. It therefore represents hidden dollar debt, so reported currency mismatches understate the bank's true dollar funding dependence.

  1. AThe swap is recorded as a long-term USD deposit with matching maturity
  2. BThe swap's forward leg is an off-balance-sheet obligation to return dollars, so the bank has hidden foreign currency debtCorrect
  3. CThe swap converts dollar liabilities into assets, removing any need for hedging
  4. DThe swap is always settled in the local currency, so no dollars are owed

Explanation

In an FX swap the bank receives dollars now and promises to return them at maturity, but conventional balance sheets typically do not show this forward obligation as debt. This leaves a hidden dollar liability, understating the true currency mismatch and funding gap.

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