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.”


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8 thoughts on “The Terrifying Case Of $65 Trillion In ‘Missing US Dollar Debt’

  1. This is certainly concerning to read. I’m reminded of the CDS debt that took down the global economy in 2008. This sounds much larger and more alarming than that even was.

  2. There is double counting, there has to be. Re-hypothecation of synthetic (ie. derivative-based) debt and collateral instruments would produce plenty of duplicative entries. I’ve heard there is a lot of that going on but I can only guess.

  3. Last week the produced a chart of global financial market sizes. The notional value of the derivatives market was $800 Trillion. Nobody knows how that might unwind, even a little bit.

  4. On this topic, any ETF or open-ended index fund (especially fixed income funds) outside the US that is tracking a FX-hedged version of the benchmark indexes would probably be rolling 1-month or 3-month FX-forwards (i.e. executing a FX swap on the roll, which is usually on month-end for most benchmark indexes), which would comprise part of the $25 trillion in non-bank US dollar obligations the BIS paper cites. As indexing and benchmark-aware investing continues to grow and assuming the USD dominates as the currency for global bond issuance, we should expect that the size of non-bank USD obligations via FX swaps will also grow due to the growing needs of funds hedging back to the underlying USD asset exposure to local currency.

  5. I traded all kinds of derivatives starting in 1983. I still find off balance sheet offensive.. I think if you borrow short and lend long you need to be transparent and you need to be regulated. Remeber the book fiasco? I do…

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