More than US$10.7tn of debt globally is not being recorded on any balance sheet anywhere, according to a just-published paper from the Bank for International Settlements (FX swaps and forwards: missing global debt?).
A key finding of the paper is that non-banks outside the United States of America owe large dollar sums off-balance-sheet through foreign exchange swaps and forward contracts. “The total is of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet dollar debt,” say the authors.
Even when this debt is used to hedge FX risk, it can still involve significant maturity mismatches, something which was once anathema to practising bankers. While the volume of missing debt could have issues for financial stability, say the authors, these are hard to assess.
Further study required
Compiling a credible answer would require further study and detailed analysis than the data that are currently available to the BIS permit. They concede, however, that much of the missing could well be hedging FX positions. This, they say, works for financial stability rather than against it. In theory.
The authors, Claudio Borio, Robert Neil McCauley and Patrick McGuire, say the paper frames the relevant issues and puts forward some answers. To do this it combines data on the total value of derivatives contracts from the Bank's own statistics with data from a range of external sources.
The result is a broader picture of how much debt might be missing, where in the world it might be and the uses to which it is being put. On the basis that some currencies are more equal than others, the authors focus mostly on the US dollar.
Claudio Borio, head of monetary and economic department, BIS
“We estimate that non-bank borrowers outside the United States have very large off-balance sheet dollar obligations in FX forwards and currency swaps,” they write. “They are of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet debt.”