# BIS warns of $80 trillion of hidden FX swap debt
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-12-05
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: BIS Warns of $80 Trillion Hidden Debt Risks in FX Swaps
Meta Description: The Bank for International Settlements (BIS) raises concerns about non-bank financial firms holding massive FX swap debt in latest report.
URL: https://financedigest.com/bis-warns-of-80-trillion-of-hidden-fx-swap-debthtml

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By Marc Jones

LONDON (Reuters) – The Bank for International Settlements (BIS) has warned that pension funds and other ‘non-bank’ financial firms now have more than $80 trillion of hidden, off-balance sheet dollar debt in the form of FX swaps.

Dubbed the central bank to the world’s central banks, the BIS raised the concerns in its latest quarterly report, in which it also said this year’s market upheaval had, by and large, been navigated without many major issues.

Having repeatedly urged central [banks to act forcefully to dampen inflation](https://www.financedigest.com/be-really-really-careful-on-inflation-bank-of-englands-haskel.html "Be ‘really, really careful’ on inflation – Bank of England’s Haskel"), it struck a more measured tone this time around and also picked over the ongoing crypto market problems and September’s UK government bond market turmoil.

Its main [warning though was what it described as the FX swap debt “blind spot” that risked](https://www.financedigest.com/tesla-to-warn-of-data-privacy-risk-from-car-security-cameras-in-germany.html "Tesla to warn of data privacy risk from car security cameras in Germany") leaving policymakers in a “fog.

FX swap markets, where for example a Dutch [pension fund or Japanese insurer borrows dollars and lends euro or yen in the “spot leg” before later](https://www.financedigest.com/are-the-over-55s-accessing-their-pensions-early-failing-to-plan-for-later-life.html "Are the over-55s accessing their pensions early failing to plan for later life?") repaying them, have a history of problems.

They saw funding squeezes during both the global financial [crisis and again in March 2020 when the COVID-19 pandemic wrought havoc that required top central banks](https://www.financedigest.com/how-the-2023-banking-crisis-unfolded.html "How the 2023 banking crisis unfolded") like the U.S. Federal Reserve to intervene with dollar [swap lines](https://www.financedigest.com/swiss-national-bank-makes-another-large-draw-on-fed-swap-line.html "Swiss National Bank makes another large draw on Fed swap line").

The $80 trillion-plus “hidden” debt estimate exceeds the [stocks of dollar](https://www.financedigest.com/world-stocks-cling-to-upbeat-mood-dollar-stalls.html "World stocks cling to upbeat mood, dollar stalls") Treasury bills, repo and commercial paper combined, the BIS said, while the churn of deals was almost $5 trillion per day in April, two thirds of daily global FX turnover.

For both non-U.S. banks and non-U.S. non-banks’ such as pension funds, dollar obligations from FX [swaps are now double their on-balance sheet dollar debt](https://www.financedigest.com/green-debt-swaps-firmly-on-the-agenda-says-new-planet-tracker-report.html "Green debt swaps firmly on the agenda, says new Planet Tracker report"), it estimated.

The missing [dollar debt from FX swaps/forwards and currency](https://www.financedigest.com/worst-not-over-for-em-currencies-as-u-s-dollar-thunders-on-reuters-poll.html "Worst not over for EM currencies as U.S. dollar thunders on: Reuters poll") swaps is huge,” the Switzerland-based institution said, describing the lack of direct information about the scale and location of the problems as the key issue.

In times of crisis, [policies to restore the smooth flow of short-term dollars](https://www.financedigest.com/asian-shares-rise-dollar-dips-ahead-of-fed-policy-decision.html "Asian shares rise, dollar dips ahead of Fed policy decision") in the financial system (e.g. central [bank swap](https://www.financedigest.com/explainer-what-are-credit-default-swaps-and-why-are-they-causing-trouble-for-europes-banks.html "Explainer-What are credit default swaps and why are they causing trouble for Europe’s banks?") lines) are set in a fog.

Graphic: Off and on-balance sheet [dollar debt](https://www.financedigest.com/dollar-eases-before-inflation-data-with-nagging-worries-over-debt-ceiling-impasse.html "Dollar eases before inflation data, with nagging worries over debt ceiling impasse") https://fingfx.thomsonreuters.com/gfx/mkt/klvygkweovg/Pasted%20image%201670230144138.png

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/12/611-480x500.jpg)

CLOSER

The report also looked at the broader [market developments](https://www.financedigest.com/concrete-placing-booms-market-notable-developments-geographical-outlook.html "Concrete Placing Booms Market: Notable Developments & Geographical Outlook") over the last few months.

BIS officials have been loudly calling for forceful interest [rate hikes](https://www.financedigest.com/sp-warns-of-possible-economic-blow-hit-to-japan-inc-from-boj-rate-hike.html "S&P warns of possible economic blow, hit to Japan Inc from BOJ rate hike") from central banks as this year’s inflation spike has taken hold, but this time it struck a more measured tone.

Asked whether the end of the tightening cycle may be looming [next year](https://www.financedigest.com/eu-could-face-gas-shortage-next-year-iea-warns.html "EU could face gas shortage next year, IEA warns"), the head of the BIS’ Monetary and Economic Department Claudio Borio said it would depend on how circumstances evolve, noting also the complexities of high debt levels and uncertainty about how sensitive borrowers now are to rising rates.

The simple answer is one is closer than one was at the beginning, but we don’t know how far [central banks](https://www.financedigest.com/governments-and-central-banks-risk-inflation-bank-of-england-has-done-its-bit-now-the-politicians-turn.html "Governments and central banks risk inflation, Bank of England has done its bit, now the politicians’ turn") will have to go.

“The enemy is an old enemy and is known,” Borio said, referring to inflation. “But it’s a long time since we have been fighting this battle”.

Graphic: [Market volatility](https://www.financedigest.com/puma-confirms-full-year-outlook-flags-market-volatility.html "Puma confirms full-year outlook, flags market volatility") https://fingfx.thomsonreuters.com/gfx/mkt/dwpkdrwgmvm/Pasted%20image%201670230377120.png

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/12/612.jpg)

DINO-MITE

Other sections of the report focused on findings from its recent [global FX market survey](https://www.financedigest.com/spacex-rocket-sends-first-global-water-survey-mission-into-orbit.html "SpaceX rocket sends first global water survey mission into orbit").

It estimated that $2.2 trillion worth of [currency trades](https://www.financedigest.com/currency-trading-in-a-spin-after-polish-explosion.html "Currency trading in a spin after Polish explosion") are at risk of failing to settle on any given day due to issues between counterparties, potentially undermining financial stability.

The amount at risk represents about one third of total deliverable FX turnover and is up from $1.9 trillion from three [years earlier when the last FX survey](https://www.financedigest.com/survey-data-28-brits-say-brexit-sped-decision-buy-uk-holiday-home-year.html "Survey Data: 28% of Brits Say Brexit Has Sped Up Their Decision to Buy a UK Holiday Home This Year") was carried out.

FX [trading also continues to shift away from multilateral trading platforms](https://www.financedigest.com/stock-trading-platforms-for-beginners.html "Stock Trading Platforms for Beginners") towards “less visible” venues hindering policymakers “from appropriately monitoring FX markets,” it said.

The bank’s Head of Research and Economic Adviser Hyun Song Shin, meanwhile, described the recent crypto market problems such as the [collapse of the FTX exchange and stable coins TerraUSD and Luna as having similar characteristics to most banking](https://www.financedigest.com/swiss-regulator-monitoring-banks-and-insurers-after-svb-collapse.html "Swiss regulator monitoring banks and insurers after SVB collapse") crashes.

He described many of the [crypto coins](https://www.financedigest.com/brave-new-coin-launches-global-classification-standard-for-crypto-assets.html "Brave New Coin Launches Global Classification Standard for Crypto Assets") sold as “DINO – decentralised in name only” and that most of their related activities took place through traditional intermediaries.

This is people taking in deposits [essentially in unregulated banks,”](https://www.financedigest.com/working-with-banks-essential-tips-for-fintechstartups.html "Working with banks – essential tips for fintechstartups") Shin said, adding it was largely about the unravelling of large leverage and maturity mismatches, just like during the financial crash over a decade ago.

“What the episode has shown is that although crypto operates under the banner of decentralised, it is quite centralised in many respects.”

(Reporting by Marc Jones; Editing by Toby Chopra)


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