Central Bank excess breeds undue risk. The negative real interest rate environment over the last decade-plus has caused Pension Funds and other non-bank institutions to take on undue risk in the pursuit of yield (we wrote about this topic at length last year). Dollar debt in FX swaps and forwards held by non-bank institutions is more than $80 Trillion. This debt is not accounted for on Balance Sheets.
To quote the Bank for International Settlements (“BIS”): FX swaps, forwards and currency swaps create forward dollar payment obligations that do not appear on balance sheets and are missing in standard debt statistics. Non-banks outside the United States owe as much as $25 trillion in such missing debt, up from $17 trillion in 2016. Non-US banks owe upwards of $35 trillion. Much of this debt is very short-term and the resulting rollover needs make for dollar funding squeezes. Policy responses to such squeezes include central bank swap lines that are set in a fog, with little information about the geographic distribution of the missing debt. FX swaps, forwards and currency swaps give rise to dollar obligations that were backstopped in 2008 and 2020 by central banks acting on little information about who owed the debt.
- Learn more by reading the BIS Quarterly Review HERE.
- Brief explainer video below.