Concerns are being raised about the $65 trillion dollar debt.

According to the Bank for International Settlements, the $65 trillion in dollar debt held by non-US institutions via currency derivatives poses a hidden risk to the global financial system.

The BIS stated in a paper titled «huge, missing, and growing» that a lack of information is making it difficult for policymakers to predict the next financial crisis. They were particularly concerned that the debt was going unrecorded on balance sheets due to accounting conventions on how to track derivative positions.

The findings, which are based on data from a survey of global currency markets conducted earlier this year, provide a rare glimpse into the magnitude of hidden leverage. Foreign-exchange swaps were a flashpoint during the 2008 global financial crisis and the 2020 pandemic, when dollar funding stress compelled central banks to intervene to assist struggling borrowers.

To be certain, the debt has been fully collateralized and is backed by hard currency. Consider a Dutch pension fund purchasing assets in the United States to better understand how the system works. It will frequently use a foreign-currency swap as part of the transaction to exchange euros for dollars.

The findings, which are based on data from a survey of global currency markets conducted earlier this year, provide a rare glimpse into the magnitude of hidden leverage. Foreign-exchange swaps were a flashpoint during the 2008 global financial crisis and the 2020 pandemic, when dollar funding stress compelled central banks to intervene to assist struggling borrowers.

To be certain, the debt has been fully collateralized and is backed by hard currency. Consider a Dutch pension fund purchasing assets in the United States to better understand how the system works. It will frequently use a foreign-currency swap as part of the transaction to exchange euros for dollars.

During times of stress, central banks have found ways to manage the demand for dollars. The Federal Reserve has tools to help prevent market seizing, such as swap lines and the FIMA Repo Facility.

The sheer magnitude of the swaps is causing concern among BIS researchers. They estimate that banks based outside the United States have $39 trillion in debt, which is more than double their on-balance-sheet obligations and ten times their capital. Derivatives are only required to be booked on a net basis, so the full amount of cash involved is not recorded on a balance sheet.