LONDON (Reuters) – Pension funds and other “non-bank” financial institutions have more than $80 trillion of hidden off-balance sheet debt in currency swaps, according to the Bank for International Settlements (BIS).
The BIS, dubbed central bank to the world’s central banks, also said in its latest quarterly report that the market turmoil in 2022 was largely navigated without major problems.
It has repeatedly urged central banks to act forcefully to curb inflation, but has struck a more cautious tone, addressing the turmoil in the crypto markets and the turmoil in the UK bond market in September.
Its main warning was about what it described as a ‘blind spot’ in FX swap debt that risks leaving policymakers in a ‘fog’.
For example, the currency swap market, where Dutch pension funds and Japanese insurance companies borrow dollars, lend euros and yen, and later repay them, has had problems in the past.
They said the global financial crisis and, again in March 2020, when the COVID-19 pandemic wreaked havoc and forced central banks such as the US Federal Reserve to intervene on dollar swap lines. Both have witnessed tighter funding.
Estimates of more than $80 trillion in “hidden” debt exceed the combined inventory of dollar-denominated government bonds, repos and commercial paper, according to the BIS. That’s up from just over $55 trillion a decade ago, but FX swap trading churn in April was about $5 trillion a day, two-thirds of his daily global FX trading volume. Equivalent to
For both non-U.S. banks and non-U.S. “non-banks,” such as pension funds, it is estimated that dollar debt from currency swaps is now twice as large as on-balance sheet dollar debt.
“The dollar debt lost from FX swaps/forwards and currency swaps is huge,” the Swiss-based agency said, adding that the lack of direct information on the scale and location of the problem was a key issue. rice field.
The report also provides an extensive assessment of recent market developments.
BIS officials have been clamoring for strong rate hikes from the central bank as inflation has taken hold, but this time they struck a more cautious tone.
Asked whether the end of the tightening cycle could be imminent next year, Claudio Borio, director of the BIS’s Monetary and Economics Division, said it would depend on how the situation developed, adding that the complexity of high debt levels and borrower He also noted uncertainty about how sensitive the current rate is to rising.
He also stressed that the crisis that erupted in the UK gold market in September could force the central bank to step in and intervene.
“The short answer is that we’re closer than we were, but we don’t know how far central banks have to go,” he said on rates.
“The enemy is an old enemy, well known,” he added, referring to inflation. “But it’s been a long time since we fought this battle.”
The report also highlights findings from the recent BIS Global FX Market Survey, which found that $2.2 trillion worth of currency trades are at risk of not settling on any given day due to counterparty issues. , it is estimated that financial stability could be undermined.
The amount at risk represents about one-third of total available FX trading volume, up from $1.9 trillion three years ago when the last FX survey was conducted.
Forex trading also continues to move from multilateral trading platforms to “low-profile” exchanges, preventing policymakers from “appropriately overseeing the foreign exchange market,” the report said. the book said.
Meanwhile, Hyun Song Shin, head of research and economics advisor at the bank, said recent crypto market problems such as the collapse of the FTX exchange and stablecoins TerraUSD and Luna are similar to bank crashes. described as having characteristics.
He explained that many of the crypto coins marketed as “DINO – decentralized in name only” and most of the associated activity was done through traditional intermediaries.
“This is basically people taking deposits in unregulated banks,” Singh said, adding that the main focus is on resolving the large mismatch in leverage and maturity, much like it did during the financial crisis more than a decade ago. I added that it is a purpose.
Reported by Mark Jones.Edited by Toby Chopra and Alexander Smith
Our standards: Thomson Reuters Trust Principles.