The Terrifying Case Of $65 Trillion In ‘Missing US Dollar Debt’

“Off-balance sheet dollar debt may remain out of sight and out of mind, but only until the next time dollar funding liquidity is squeezed,” the BIS warned on Monday.

The bank’s cautionary remarks, penned by Claudio Borio, Robert McCauley and Patrick McGuire, weren’t actually written Monday, but that’s when they were released, as part of the BIS’s quarterly review.

Quarterlies from the “central bank for central banks” are always worth a read. I used to recap them here as a matter of course, but over the years, I scaled back dedicated coverage. They’re publicly available, after all, and there’s an “anyone who’s interested probably read the original” dynamic in play. In addition, they sometimes read like a compendium of risks, which is kinda the point, but to the uninitiated, summaries almost invariably come across as unduly alarmist.

In any case, the bank’s warning was worth a mention. As of June 2022, payment obligations tied to FX swaps, forwards and currency swaps exceeded global GDP, at $97 trillion. Needless to say, the vast majority (88%) of those positions have the dollar on one side. Borio, McCauley and McGuire provided a simple example: “An investor or bank wanting to do an FX swap from, say, Swiss francs into Polish zloty would swap francs for dollars and then dollars for zloty.”

The figure (below) shows one reason why this is a potential land mine. 75% of the outstanding amounts mature within a year.

Based on data from an April survey, 70% of FX swaps turnover was comprised of instruments maturing within a week, and nearly a third matured overnight.

The read-through is straightforward. As Borio, McCauley and McGuire wrote: “When dollar lenders step back from the FX swap market, the squeeze follows immediately.”

They went on to quantify the scope of “missing dollar debt,” defined as obligations incurred under FX swaps, forwards and currency swaps. One concern lies with more than $25 trillion in dollar obligations residing with non-banks outside the US (red bars in the figure below).

Those are dollars borrowed to hedge USD receivables and investments “in a world in which the dollar is the dominant international currency,” as the authors put it.

As you can see, the off-balance sheet sum (the “missing” dollar debt) is markedly larger than the on-balance sheet amount. Specifically, it’s twice as large.

At the same time, non-US banks have almost $40 trillion in “missing” dollar obligations (figure below), which is potentially problematic because, as the BIS noted, their access to the Fed’s discount window is limited.

That sum (the $39 trillion shown by the right-most grey bar in the chart) is nearly half the size of those institutions’ total liabilities, apparently.

All told, the above suggests some $65 trillion in combined off-balance sheet dollar obligations for non-banks outside the US and non-US banks whose access to Fed facilities is confined to their US operations.

There may be some double-counting there. I honestly have no idea, and it doesn’t sound like anyone else does either. What I do know is that the $65 trillion figure makes for a good headline, and to the extent this is important (which the BIS plainly thinks it is), the more people who read it, the better. Good headlines typically mean more readers. So, I’m performing a public service.

Coming full circle, this is a hidden risk which could be pushed (or shoved) to the fore in the event of a dollar liquidity crunch. The authors’ contention is that the scope of these off-balance sheet USD obligations is underappreciated. And vastly so.

“It is not even clear how many analysts are aware of [their] existence,” Borio, McCauley and McGuire said. “This makes it difficult to anticipate the scale and geography of dollar rollover needs.”