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EXCEEDED 400 FX ASSETS FULL
Accounting conventions leave it mostly off-balance sheet, as a derivative, even though it is in effect a secured loan with principal to be repaid in full at maturity. The more detailed analysis focuses on the dollar segment, given the currency's outsize role in the foreign exchange and other financial markets. To do so, it breaks ground in combining data on the aggregate amount of outstanding derivatives contracts (from the BIS derivatives statistics) with information from the international banking statistics and from ad hoc surveys to form a view of the size, geography and use of the missing foreign currency debt. This special feature frames the issues and suggests some answers. In response, central banks had to replace lost dollar funding that financed dollar assets (McGuire and von Peter (2009), BIS (2017)). For instance, serious strains seized the FX swap market during the Great Financial Crisis (GFC). How much is owed, by whom and for what purpose: trade hedging, asset-liability management, market-making? What does it imply for measures of international credit like the BIS global liquidity indicators (GLIs)? Answers to these questions can inform assessments of global financing conditions and financial stability. This debt is, in effect, missing.Īs a result, we know little about it. And yet one cannot find these amounts on balance sheets. For the US dollar alone, contracts worth tens of trillions of dollars stand open and trillions change hands daily. But foreign exchange (FX) derivatives, mainly FX swaps, currency swaps and the closely related forwards, also create debt-like obligations. Many deals take place in the cash market, through loans and securities. 1 JEL classification: F31, F34, F41.Įvery day, trillions of dollars are borrowed and lent in various currencies. Even when this debt is used to hedge FX risk, it can still involve significant maturity mismatches. The total is of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet dollar debt. A key finding is that non-banks outside the United States owe large sums of dollars off-balance sheet through these instruments. What would balance sheets look like if the borrowing through FX swaps and forwards were recorded on-balance sheet, as the functionally equivalent repo debt is? We combine various data sources to estimate the size, distribution and use of this "missing" debt and to begin to assess its implications for financial stability.