The Bank for International Settlements has warned that pension funds and other 'non-bank' financial firms now have more than US$80 trillion (HK$624 trillion) of hidden, off-balance sheet dollar debt in the form of FX swaps.

Dubbed the central bank to the world's central banks, the BIS raised the concerns in its latest quarterly report, in which it also said this year's market upheaval had, by and large, been navigated without many major issues.

Its main warning though was what it described as the FX swap debt "blind spot" that risked leaving policymakers in a "fog."

FX swap markets, where for example a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen in the "spot leg" before later repaying them, have a history of problems.

They saw funding squeezes during both the global financial crisis and again in March 2020 when the pandemic wrought havoc that required top central banks like the US Federal Reserve to intervene with dollar swap lines.

The US$80 trillion-plus "hidden" debt estimate exceeds the stocks of dollar Treasury bills, repo and commercial paper combined, the BIS said, while the churn of deals was almost US$5 trillion per day in April, two thirds of daily global FX turnover.

For both non-US banks and non-US 'non-banks' such as pension funds, dollar obligations from FX swaps are now double their on-balance sheet dollar debt, it estimated.

"The missing dollar debt from FX swaps/forwards and currency swaps is huge," the Switzerland-based institution said, describing the lack of direct information about the scale and location of the problems as the key issue.

"In times of crisis, policies to restore the smooth flow of short-term dollars in the financial system (eg central bank swap lines) are set in a fog," it said.

The BIS warning came in its latest quarterly report. REUTERS

BIS warns of US$80tn hidden FX swap debt