Bank for International Settlements: The amount of off-balance sheet US dollar debt is alarming, and the risk of foreign exchange risk settlement remains high

On December 5, Claudio Borio, head of the monetary and economic department of the Bank for International Settlements (BIS), and Hyun Song Shin, head of economic advisory and research at BIS, briefed the media on the latest quarterly report of BIS and answered questions from the mediaforeign exchange marketLiquidity conditions, monetary policy, and cryptocurrency assets.

The latest quarterly outlook from BIS provides up-to-date insights into the global foreign exchange and over-the-counter interest rate derivatives markets, designed to help global central banks and market participants monitor global financial marekts. The authors analyse changes in trading patterns and market structure and identify risks that merit further attention.

The latest BIS data show that $2.20 trillion of foreign exchange trades are at risk of settlement every day, and failure by one party to honour a contract can "cause significant losses to market participants and sometimes have systemic consequences".

Surveys show that off-balance sheet dollar borrowing in the form of foreign exchange swaps, forwards and currency swaps is on the rise. Claudio Borio, Robert McCauley and Patrick McGuire explain that these instruments currently generate future payment obligations equivalent to more than $80 trillion globally. But because these liabilities are not reported on banks' balance sheets, standard debt statistics cannot capture them.

"The BIS triennial survey analysis continues to reveal corners of the global financial marekt that would otherwise have been overlooked. The rich data sets allow us to identify important trends for policymakers, researchers and market participants. In particular, the volume of off-balance sheet US dollar debt is staggering and partly hidden, and foreign exchange risk settlement risk remains high," said Claudio Borio.

The BIS report also provides an analysis of recent market developments. In its report, the BIS notes that investors remained focused on central banks' efforts to combat inflation amid risks to economic growth during the reporting period. Short-term sovereign bond yields rose on expectations of higher policy rates, weighing on risky assets and supporting the dollar. After weaker-than-expected US inflation data in November, equities recovered losses and the dollar retreated from multi-decade highs against most currencies, as markets reassessed the degree of policy tightening ultimately needed to contain inflation.

"Earlier this year, the strength of the dollar, combined with high commodity prices, had a double impact on many countries struggling with currency inflation. The recent depreciation of the dollar may help ease these pressures," said Hyun Song Shin.

The global economy has accumulated huge amounts of debt in recent years, posing a challenge for central banks to deal with inflation. Claudio Borio believes that one factor that complicates the task of dealing with inflation is the high level of debt in the public and private sectors around the world. "The increasing borrowing shows that the economy is more sensitive to interest rate hikes, but we don't yet know the exact sensitivity," Claudio Borio said.

When referring to the recent performance of the cryptocurrency market, Hyun Song Shin said that the problems of the cryptocurrency market, including the bankruptcy of the FTX exchange and the collapse of the stablecoins TerraUSD and Luna, have similar characteristics to most of the earlier banking crashes. Many of the cryptocurrencies sold are actually "DINO", which is "nominally decentralized", but most of these activities are carried out through traditional intermediaries. People are like depositing in unregulated banks. As leverage and borrowing risks erupt, there are the same problems as the financial crisis more than a decade ago.