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BIS Discovered $80 Trillion Debt. Borrowers Are Not Yet Identified

Bank for International Settlements. Source:
Bank for International Settlements. Source:

The BIS report has revealed an $80 trillion debt falling out of the balance sheets of financial organizations. It might be a ticking bomb for the next crisis.

The ‘blind spot’, as the report refers to it, was found in foreign exchange swaps, or FX swaps. The main participants of FX swaps, according to the report, are financial institutions, like pension funds, insurance companies, and hedge funds.

FX swap is an agreement between two parties to trade one currency for another with a reverse transaction later. When someone uses a swap to borrow dollars, they in effect pay for them with their own currency and make a commitment to sell the dollars back at a certain date in the future, most often in less than a year.

Accounting conventions allow not recording this financial instrument on a balance sheet. Thus central banks cannot see, evaluate and locate the exact amount of hidden debt. This debt belongs to non-U.S. borrowers. Banks outside the US owe more than $35 trillion, while non-banks outside the US owe up to $25 trillion. The total outstanding liabilities embedded in the foreign exchange market are closer to "more than $80 trillion," the report said. The figure of $80 trillion refers only to dollar-nominated debt, which is dominating the market. Considering all currencies, the evaluation of the off-balance debt reaches $97 trillion. To compare, the global GDP in 2021 was $96 trillion.

Much of this debt is very short-term: almost one-third of FX swaps mature overnight, and about 70% doesn’t last for more than a week. That’s where we can have a problem called “maturity mismatch”: a company with long-term assets and short-term liabilities could go bankrupt the moment liquidity in dollars become difficult to source when dollar lending suddenly dries up.

The report recommends developing some rules that would allow getting clear statistics on the size and location of this outstanding short-term dollar debt.

“BIS analysis of the Triennial Survey continues to shed light on some corners of global financial markets that would otherwise go unnoticed. The rich data set allows us to detect important trends for policymakers, researchers and market participants. In particular, there is a staggering volume of off-balance sheet dollar debt that is partly hidden, and FX risk settlement risk remains stubbornly high.” - Claudio Borio, Head of the Monetary and Economic Department at the Bank for International Settlements.

Now imagine you are on board a ship and you see a giant iceberg in front of it. Would you like to know the exact volume of this iceberg? Do you really need to measure its width and height? Probably it depends on how fast you are going and on the time you have to do this research. The conclusion by the BIS shows that we have plenty of time. Do we?