The Bank for International Settlements (BIS) said that ‘non-bank’ financial companies, such as pension funds, and others have debt worth $80 trillion in FX swaps, which is off-balance sheet and hidden.
Referred to as the central bank to all the central banks in the world, the BIS, made these revelations in its latest quarterly report.
It also said that the market upheaval that had taken place this year had been navigated without any such major problems for the most part.
Previously, BIS had been urging global central banks to make as many efforts as possible for dampening inflation.
However, this time around its tone was a bit more measured, as it went over the turmoil in the crypto market and also the troubles in the UK bond market that had occurred in September.
But, its primary warning was what it has termed as the ‘blind spot’ of the FX swap debt, which it said would leave policymakers in trouble.
There has been a history of problems associated with FX swap markets, as they had funding issues back in 2008 when the global financial crisis occurred.
The same was seen back in March 2020 when the global COVID-19 pandemic first struck and wreaked havoc.
This prompted the intervention of central banks, including the US Federal Reserve, which had introduced dollar swap lines.
The BIS stated that the estimate of the $80 trillion as well as other ‘hidden’ debt is higher than the combined stocks of commercial paper, repo, and dollar Treasury bills.
A decade ago, this debt had been around $55 trillion, but it has grown significantly. In April, the volume of FX swap deals had reached $5 trillion daily, which is about two-thirds of the global turnover of the FX market.
BIS estimated that the dollar obligations of all banks outside the US and non-banks outside the US associated with FX swaps have doubled, which means that their balance sheet dollar debt has doubled.
The Switzerland-based bank said that there is a huge amount of missing dollar debt from currency swaps and FX swaps.
It also added that the key issue was that the location and scale of the problem remain unclear for the most part.
The BIS report also highlighted some of the recent developments that had taken place in the market. The officials have been calling on central banks to aggressively hike interest rates for dealing with inflation.
But, they did not take the same tone this time around. Claudio Borio, the head of the Monetary and Economic Department at BIS, said that the circumstances would determine if the tightening cycle should end or not.
He noted that the sensitivity of borrowers to increasing interest rates remained unclear and high levels of debt were causing a lot of complications.
In September, the UK bond markets also experienced turmoil and it showed that central banks may be forced to intervene even when they are increasing interest rates to battle inflation.
In the case of the UK, the Bank of England had to buy bonds to deal with the crisis. Talking about interest rates, Borio said that it was unclear as to how much tightening would be needed.
He added that while inflation was an old enemy, they had been fighting it for quite a while.