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Visualization of $65 Trillion in Hidden Dollar Debt

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The scale of hidden dollar debt around the world is huge.

No less than $65 trillion in unrecorded dollar debt circulates in the global financial system with non-U.S. banks and shadow banks. By comparison, global GDP is $104 trillion.

This dollar debt is in the form of currency swaps, which have exploded over the past decade due to years of monetary easing and ultra-low interest rates as investors sought higher yields. Today, the unrecorded debt from these foreign exchange swaps is worth more than double the dollar debt officially recorded on the balance sheets of these institutions.

Based on an analysis by the Bank of International Settlements (BIS), the above infographic charts the rise in hidden dollar debt among non-U.S. financial institutions and examines the broader implications of its growth.

Dollar Debt: A Beginner’s Guide

To begin with, we will briefly discuss the role of currency swaps (forex) in the global economy. The forex market is by far the largest in the world, trading trillions daily.

Some of the major players using foreign exchange swaps are:

  • Businesses
  • Financial Institutions
  • Central banks

Understanding Forex swaps is looking at the role of currency risk. As we have seen in 2022, the US dollar is on a tear. When this happens, it hurts business revenue that generates revenue across borders. That’s because they generate earnings in foreign currencies (which have likely depreciated against the dollar), but ultimately convert their earnings into US dollars.

To reduce currency risk, market participants will purchase forex swaps. Here, two parties agree to exchange one currency for the other. In short, this helps protect the company against unfavorable exchange rates.

In addition, due to accounting rules, forex swaps are often not reported on the balance sheet and are therefore quite opaque.

A mountain of debt

Since 2008, the value of this opaque, unrecorded dollar debt has nearly doubled.

Date Non-US bank
Unregistered debt
Non-U.S. Shadow Bank
Unregistered debt
2022* $39.4 trillion $26.0T
2021 $37.1 trillion $25.0T
2020 $34.5 trillion $22.9 trillion
2019 $32.9 trillion $21.5 trillion
2018 $32.4 trillion $20.1 trillion
2017 $31.2 trillion $18.8 trillion
2016 $27.9 trillion $17.0T
2015 $25.1 trillion $15.6 trillion
2014 $30.0T $17.0T
2013 $30.8 trillion $15.7 trillion
2012 $28.9 trillion $15.9 trillion
2011 $27.5 trillion $14.7 trillion
2010 $24.8 trillion $15.0T
2009 $21.4 trillion $12.1 trillion
2008 $21.9 trillion $12.4 trillion

*From June 30, 2022

Its rise was partly driven by an era of global interest rate floors. When investors looked for higher returns, they got more leverage – and forex swaps are one example.

With interest rates rising, forex swaps have increased amid higher market volatility as investors look to hedge currency risk. This occurs both with non-US banks and non-US shadow banks, which are unregulated financial intermediaries.

In general, the value of unrecorded debt is staggering. An estimated $39 trillion is held by non-U.S. banks along with $26 trillion in overseas shadow banks around the world.

Past case studies

Why does the huge growth in dollar debt pose risks?

During the market crashes of 2008 and 2020, forex swaps faced funding issues. To borrow US dollars, market participants had to pay high rates. Much of this depended on the impact of extreme volatility on these swaps, which put pressure on funding rates.

Here are two examples of how volatility can increase risk in the forex market:

  • Exchange rate volatility: Sharp fluctuations in USD can cause a liquidity crisis
  • US interest rate volatility: Sudden price fluctuations can result in much higher costs for these transactions

In both cases, the US central bank had to intervene to provide liquidity to the market and prevent dollar shortages. This was done by pumping money into the system and creating swap lines with other non-US banks such as the Bank of Canada or the Bank of Japan. These are designed to protect against declining currency values ​​and a liquidity crisis.

Dollar debt: the broader implications

The risk of growing dollar debt and these swap lines arises when a non-US bank or shadow bank is unable to honor the end of the deal. In fact, there is an estimate daily $2.2 trillion in forex swaps exposed to settlement risk.

Given its sheer size, this dollar debt could have greater systemic spillover effects. If participants do not pay, this can undermine the stability of the financial market. As demand for US dollars increases during market uncertainty, a deteriorating economic environment could potentially expose the forex market to more vulnerabilities.

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