Wednesday, December 14, 2022

FX swaps and forwards add to off-balance sheet risks


FX swaps, forwards and currency swaps are forward dollar payment obligations which do not show up on the balance sheet. They are hedging, speculative and funding vehicles, and not the same as debt, yet they are obligations that must be met and usually have maturities less than a year. Under a stressed environment like the GFC, these obligations will lead to financial risks which may require central bank intervention. 

Forward swaps are dollar repos but not recorded on the balance sheet. As a funding source, there is a payment obligation which can be a risk flashpoint. As the dollar rises, the risks associated with these often dollar liabilities increase. 

Are the size of these FX these swaps a point of crisis? No. Is there a potential for a crisis? Yes. The Fed will likely have to be a the lender of last resort, but before that liquidity comes available offshore bank and non-bank institutions will be stressed. 




No comments: