Reference News Network July 7 report. According to the website of the "Nikkei Shimbun", on July 2, the Bank for International Settlements (BIS) issued a warning about the extremely high "implicit debt" in US dollars. This is a method of raising US dollars through financial derivatives, which has become increasingly common not only in banks, but also in insurance companies and investment funds. By the end of 2024, the total amount of global implicit US dollar debt had reached 98 trillion US dollars, which could trigger a widespread liquidity crisis.

Implicit debt mainly refers to US dollars raised through financial derivatives known as "currency swaps". These funds are raised by exchanging local currencies and must be repaid in US dollars at a certain time. Most of them are short-term products with a term of less than one year. Because they are not included in the balance sheet, the BIS calls them "implicit debt".

The huge scale of implicit debt makes it impossible for the BIS, which monitors the global settlement market, to ignore it. By the end of 2023, the total amount of global implicit US dollar debt had risen from 41 trillion US dollars at the end of 2008 (after the Lehman crisis) to 91 trillion US dollars, and continued to expand to 98 trillion US dollars by the end of 2024. It is estimated that by the end of 2023, about 41 trillion US dollars of this was held by banks headquartered outside the United States.

Moreover, according to the BIS, "non-bank institutions are the largest users of foreign exchange swap transactions." Usually, investment funds are less regulated than banks, and their information disclosure is not as comprehensive as that of banks.

This may pose a trap for financial regulators. Once an adverse event occurs, financial institutions may be forced to obtain US dollars at a higher cost or sell assets denominated in US dollars to repay debts, thereby worsening their financial condition.

However, there is currently a lack of data, so it is difficult to have detailed information. It is difficult to predict which countries and regions will experience a shortage of US dollars and how severe it will be. There is concern that central banks will have to take action in an uncertain situation.

Professor Masashi Nakajima, who previously worked at the Bank of Japan and the BIS, said regarding the expansion of implicit debt: "This means that potential risks are increasing. Once something happens, the impact will be more severe. Financial institutions with weak foundations are likely to be hit first."

By March 2025, the three major banks, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group, were unable to repay foreign currency loans with foreign currency deposits. The loan-to-deposit ratios of the three were 109%, 131%, and 127% respectively, all of which were in a state of over-lending.

The gap was filled by issuing corporate bonds and swapping for longer-term maturities. By March 2025, the funding amounts of the three banks, Mitsubishi UFJ, Sumitomo Mitsui, and Mizuho, were 82 billion US dollars, 146 billion US dollars, and 93.7 billion US dollars respectively. In the event of a financial crisis, there is still a risk of a shortage of US dollars due to increased loans or outflows of deposits.

After the outbreak of the COVID-19 pandemic in 2020, financial institutions and companies rushed to purchase US dollars, causing a general shortage of US dollars in the market. The Federal Reserve then increased the supply of US dollars through other central banks such as the Bank of Japan and the European Central Bank, eventually calming the situation.

However, there is doubt about whether the Federal Reserve's "emergency supply of US dollars" can continue, as the current Trump administration is trying to require countries to share the costs of providing the base currency, the US dollar, globally.

Longtao Kono, chief economist at Paris Securities, pointed out: "Once a global financial crisis occurs, it has become extremely uncertain whether the Federal Reserve will provide US dollars to major central banks."

The ongoing tension in the Middle East region is also worrying. Shoichi Ueno, chief economist at the Nihon Keizai Research Institute, said: "Although the possibility is low, if factors such as the closure of the Strait of Hormuz lead to prolonged increases in oil prices, it could lead to economic deterioration and credit tightening worldwide. Since no one provides funds, liquidity will tighten." (Translated by Liu Lin)

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