‘Staggering’ Volume of Off-Balance Sheet Dollar Debt Is Partly Hidden

A “huge, missing and growing” pile of debt held by non-U.S. institutions may total as much as $80 trillion, according to a report this week from the Bank for International Settlements.

“There is a staggering volume of off-balance sheet dollar debt that is partly hidden, and FX risk settlement remains stubbornly high,” Claudio Borio, head of the monetary and economic department at the BIS, told Bloomberg. It’s mostly held in currency swaps.

The debt exceeds the combined value of U.S. Treasury bills, repo, and commercial papers combined, making it difficult for policymakers to recognize where there may be a need for dollars to combat a future financial crisis.

A Dutch pension fund will borrow dollars and lend in euros, later repaying the dollars and receiving back the euros. It’s essentially a repurchasing agreement with a currency, and accounting conventions on recording derivatives mean that these swaps aren’t recorded.

The FX market is vulnerable to a funding squeeze in times of crisis when dollars are hard to source. In most of these unrecorded exchanges, the U.S. is the lender, with the debt existing internationally. 

To avert recessions, the Federal Reserve generally uses currency swap lines to calm the market, as it did during the financial crisis of 2008 and the start of the pandemic in 2020.  Debt that’s partly hidden means policymakers will be in the dark when making these decisions.

“It is not even clear how many analysts are aware of the existence of the large off-balance sheet obligations,” the BIS wrote in its report. “In times of crises, policies to restore the smooth flow of short-term dollars in the financial system (e.g., central bank swap lines) are set in a fog.”

In breaking down the debt, the bank noted that non-bank institutions outside the U.S. owe at least $26 trillion in debt, double their recorded dollar debt. That’s up from the $17 trillion the BIS recorded in 2017. Non-US banks owe an estimated $39 trillion in FX swaps, forwards, and currency swaps.