Key Takeaways:
- BIS warns risks that have built up could undermine global attempts to fight inflation.
- $2.2 trillion worth of currency trades are at risk of failing to settle —BIS global FX market survey.
LAGOS (CoinChapter.com) — The Bank for International Settlements (BIS) has expressed concern 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.
In detail, the BIS dubbed the bank for central banks issued the warning in its latest quarterly report. According to the bank, the present development can have a diverse effect on the economy undermining global attempts to fight inflation.
The Switzerland-based bank warning centered on what it described as the FX swap debt “blind spot” that risked 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 before later repaying them, have a history of problems.
The bank having repeatedly urged central banks to act forcefully to dampen inflation, said the $80 trillion-plus “hidden” debt estimate exceeds the stocks of dollar Treasury bills, repo, and commercial paper combined.
BIS noted that it has grown from just over $55 trillion a decade ago. Additionally, the churn of FX swap deals was almost $5 trillion a 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, it estimated.
The missing dollar debt from FX swaps/forwards and currency swaps is huge, BIS said. It added that the lack of direct information about the scale and location of the problems was the key issue.
BIS Officials Have Been Calling For Forceful Interest Rate Hikes
The report also assessed broader recent market developments. BIS officials have been loudly calling for forceful interest rate hikes from central banks as inflation 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, the head of the BIS’ Monetary and Economic Department Claudio Borio said it would depend on how circumstances evolve. He also queried the complexities of high debt levels and uncertainty about how sensitive borrowers now are to rising rates.
The crisis that erupted in UK gilt markets in September also underscored that central banks could be forced to step in and intervene – in the UK’s case by buying bonds even at a time when it was raising interest rates to curb inflation.
“The simple answer is one is closer than one was at the beginning, but we don’t know how far central banks will have to go. The enemy is an old enemy and is known. But it’s a long time since we have been fighting this battle.”
Borio said.
FX Trading Shift Away From Multilateral Trading Platforms
The report also focused on findings from the recent BIS global FX market survey, which estimated that $2.2 trillion worth of currency trades 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 conducted. FX trading also continues to shift away from multilateral trading platforms 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 recent crypto market problems such as the collapse of the FTX exchange and stable coins TerraUSD and Luna as having similar characteristics to banking crashes.
He described many of the crypto coins sold as “DINO – decentralized in name only” and that most of their related activities took place through traditional intermediaries.
