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UNRECORDED CORPORATE LIABILITIES Visualizing $65 Trillion in Hidden Dollar Debt 
Visualizing $65 Trillion in Hidden Dollar Debt ... Graphics/Design: Sabrina Lam Original article: Peter Burgess COMMENTARY Peter Burgess | ||
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Visualizing $65 Trillion in Hidden Dollar Debt ... The scale of hidden dollar debt around the world is huge.
Written by Dorothy Neufeld Published on January 7, 2023 No less than $65 trillion in unrecorded dollar debt circulates across the global financial system in non-U.S. banks and shadow banks. To put in perspective, global GDP sits at $104 trillion. This dollar debt is in the form of foreign-exchange swaps, which have exploded over the last decade due to years of monetary easing and ultra-low interest rates, as investors searched for higher yields. Today, unrecorded debt from these foreign-exchange swaps is worth more than double the dollar debt officially recorded on balance sheets across these institutions. Based on analysis from the Bank of International Settlements (BIS), the above infographic charts the rise in hidden dollar debt across non-U.S. financial institutions and examines the wider implications of its growth. Dollar Debt: A Beginners Guide To start, we will briefly look at the role of foreign-exchange (forex) swaps in the global economy. The forex market is the largest in the world by a long stretch, with trillions traded daily. Some of the key players that use foreign-exchange swaps are:
In order to reduce currency risk, market participants will buy forex swaps. Here, two parties agree to exchange one currency for another. In short, this helps protect the company from unfavorable foreign exchange rates. What’s more, due to accounting rules, forex swaps are often unrecorded on balance sheets, and as a result are quite opaque. A Mountain of Debt Since 2008, the value of this opaque, unrecorded dollar debt has nearly doubled. 
Trend of Unrecorded Debt in Non-US Banks and Non US Shadow Banks Driving its rise in part was an era of rock-bottom interest rates globally. As investors sought out higher returns, they took on greater leverage—and forex swaps are one example of this. Now, as interest rates have been rising, forex swaps have increased amid higher market volatility as investors look to hedge currency risk. This appears in both non-U.S. banks and non-U.S. shadow banks, which are unregulated financial intermediaries. Overall, the value of unrecorded debt is staggering. An estimated $39 trillion is held by non-U.S. banks along with $26 trillion in overseas shadow banks around the world. Past Case Studies Why does the massive growth in dollar debt present risks? During the market crashes of 2008 and 2020, forex swaps faced a funding squeeze. To borrow U.S. dollars, market participants had to pay high rates. A lot of this hinged on the impact of extreme volatility on these swaps, putting pressure on funding rates. Here are two examples of how volatility can heighten risk in the forex market:
Dollar Debt: The Wider Implications The risk from growing dollar debt and these swap lines arises when a non-U.S. bank or shadow bank may not be able to hold up their end of the agreement. In fact, on a daily basis, there is an estimated $2.2 trillion in forex swaps exposed to settlement risk. Given its vast scale, this dollar debt could have greater systemic spillover effects. If participants fail to pay it could undermine financial market stability. Because demand for U.S. dollars increases during market uncertainty, a worsening economic climate could potentially expose the forex market to more vulnerabilities.
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