{"id":22956,"date":"2022-12-05T12:31:13","date_gmt":"2022-12-05T17:31:13","guid":{"rendered":"https:\/\/www.bu.edu\/gdp\/?p=22956"},"modified":"2022-12-05T14:40:47","modified_gmt":"2022-12-05T19:40:47","slug":"dollar-debt-in-fx-swaps-and-forwards-huge-missing-and-growing","status":"publish","type":"post","link":"https:\/\/www.bu.edu\/gdp\/2022\/12\/05\/dollar-debt-in-fx-swaps-and-forwards-huge-missing-and-growing\/","title":{"rendered":"Dollar Debt in FX Swaps and Forwards: Huge, Missing and Growing"},"content":{"rendered":"
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Singapore. Photo by Corporate Locations via Unsplash.<\/figcaption><\/figure>\n

Embedded in the foreign exchange (FX) market is huge, unseen dollar borrowing. In an FX swap, for instance, a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen in the \u201cspot leg\u201d, and later repays the dollars and receives euro or yen in the \u201cforward leg.\u201d Thus, an FX swap, along with its close cousin, a currency swap, resembles a repurchase agreement, or repo, with a currency rather than a security as \u201ccollateral.\u201d<\/span><\/p>\n

FX swap markets are vulnerable to funding squeezes. This was evident during the Global Financial Crisis (GFC) and again in March 2020 when the COVID-19 pandemic wrought havoc on the world economy. In both cases, swaps emerged as flash points, with dollar borrowers forced to pay high rates, if they could borrow at all. To restore market functioning, central bank swap lines funneled US dollar to non-US banks offshore, which on-lent to those scrambling for dollars. This off-balance sheet dollar debt poses particular policy challenges, as it is not accounted for in standard debt statistics. The missing dollar debt from FX swaps, forwards and currency swaps is huge, adding to the vulnerabilities created by on-balance sheet dollar debts of non-US borrowers.<\/span><\/p>\n

A <\/span>new journal article<\/i><\/b><\/a> in <\/span>BIS Quarterly Review <\/span><\/i>by <\/span>Robert McCauley<\/span><\/a>, Claudio Borio and Patrick McGuire draws on the comprehensive data in the 2022 Bank for International Settlements (BIS) Triennial Survey to update the stylized facts concerning FX swaps, forwards and currency swaps. The authors also measure the missing dollar debt for non-banks resident outside the United States and for banks headquartered outside the US.<\/span><\/p>\n

Key findings:<\/b><\/h5>\n