BIS raises concern over hidden FX swap debt of over $80 trillion

The Bank for International settlements has said that pension funds, alongside other non-banking financial institutions, have over $80 trillion in hidden debt in FX swaps. The BIS further said that this year’s adverse market events had been navigated without causing significant issues.

BIS reveals over $80 million in hidden FX Swaps debt

The BIS is an institution that functions as a central bank for the other central banks globally. The company released its most recent quarterly report mentioning that the upheaval seen in financial markets had been averted well.

The institution has urged central banks globally to take strict measures to prevent inflation from rising further. The institution has also addressed the troubles faced by the crypto market this year and the turmoil in the UK bond market.

One of the main areas of concern that the institution mentioned was the FX swap debt. It noted that this was a “blind spot” with a high risk of leaving the policymakers in uncertain situations.

Issues have historically plagued FX swap markets. During the global financial crisis of 2008 and when the COVID pandemic hit in March 2020, FTX swap markets saw funding squeezes. These situations triggered a response from central banks such as the US Federal Reserve, which intervened using dollar swap lines.

The BIS added that the current hidden debt in FX swap markets of more than $80 trillion was higher than the combined total of US Treasury bills, commercial paper, and repo. Moreover, this debt estimate had increased from a little over $55 trillion a decade ago.

It further estimated that for banks and non-banking institutions outside the US, the dollar obligations from FX swaps were two times higher than what was reflected in their on-balance sheet dollar debt. It mentioned that the critical issue behind the large discrepancy was the lack of access to direct information and the location of the issues.

BIS addresses recent developments in financial markets

The Switzerland-based institution also shared a closer look at the developments that have happened in the financial market recently. The institution has supported aggressive interest rate hikes from central banks amid increasing inflation.

However, the BIS seems to be taking a calmer tone on the matter. The head of Monetary and Economic Department at the BIS, Claudio Borio, said that more monetary tightening policies in 2023 would depend upon how the current situation changes, given that borrowers were shying away from the rising rates.

The Head of Research and Economic Adviser at the BIS, Hyun Song Shin, also addressed the recent turmoil in the crypto industry, particularly the collapse of the FTX exchange and the crash of the Terra LUNA and TerraUSD ecosystems in May.

He noted that the majority of cryptocurrencies were only decentralized in name, but most of the activities were conducted using traditional intermediaries. Therefore, the current turmoil was caused by the unraveling of large leverage and mismatches in maturity.