The banks would NOT have to temporarily convert currency into bitcoin. I could see them sending blocks of fed notes (1,000,000's 100,000's 10,000's) with marked satoshi's/colored coins. Of course they would still have to pay transaction fees with bitcoins. I believe it would still be bullish from Bitcoin being acknowledged. It just would be a way more subdued trip to the moon since they would not need a billion dollars of bitcoin to transfer billion dollars of fed notes just a few marked satoshi's.
Can you please elaborate on how the block chain can be used to send fed notes (or other non BTC transactions) without using actual bitcoins?
It will be using actual bitcoins, just fractions (colored coins). It will be like Nasdaq's experiment where hey are planning to transfer stocks on the blockchain, or the transfer of property deeds or other assets using the blockchain.