Overview: The 'Missing' $65 Trillion
The BIS (Bank for International Settlements) report claiming '$65 trillion missing' is a dramatic headline, but market experts consider it misleading. The report highlights issues with monitoring the massive FX swaps market, but the real concerns are deeper and more nuanced. This echoes themes explored in Global Economic Forces: Debt, Technology, and Geopolitical Risks Explained, where systemic vulnerabilities can be obscured by sensational figures.
The Real Issues Behind the Headline
The LIBOR Transition's Unseen Impact
The shift from LIBOR to risk-free rates (like SOFR in the US) has fundamentally changed market risk profiles. The key concern is that:
- Risk has shifted out of the market because new rates are backed by secured collateral (e.g., repo market transactions)
- Derivatives tied to credit-sensitive rates are no longer needed, leading to a dent in derivatives trading (like forward rate agreements)
- This creates a new, poorly understood risk environment where rates are effectively 'fixed'
To understand how such transitions can destabilize markets, see Understanding the Looming Recession: Why Only the Paranoid Survive in Today's Market, which explores similar hidden risks.
The Long Shadow of Quantitative Easing
Decades of central bank intervention (quantitative easing/monetary stimulus) have reshaped the markets. The BIS report suggests regulators haven't fully assessed how this has changed risk distribution, particularly in:
- Derivatives contracts and swaps that cannot be easily aggregated or monitored
- Balance sheet imbalances across the global financial system
For a deeper dive into how derivative markets operate under stress, refer to Mastering Market Maker Models: Forex, Indices & Stock Trading Insights.
The Shift to 'Shadow Banking' Risks
The transition has pushed risk into other areas, which the report acknowledges:
- Shadow banking components (e.g., money market funds) now carry risks that were previously in the traditional banking system
- Regulators lack full visibility into this shadow market, making it hard to know if the underlying debt is 'good or bad'
Regulatory blind spots like these have historically led to crises. Learn from parallels with The FTX Collapse: A Deep Dive into the Downfall of a Crypto Giant.
What Would Cause a Real Crisis?
While the $65 trillion number is dramatic, a true domino effect would stem from:
- Imbalances in risk distribution across markets, not the headline number
- Regulators' inability to understand how quantitative easing shifted risks
- The BIS's need to assess changes in developed markets to truly grasp financial stability threats
This aligns with insights from Understanding Cryptocurrency Derivatives and Market Trends, which highlights how risk migration can create systemic vulnerabilities.
Bottom line: The 'missing' money isn't vanished, but its risk profile has fundamentally changed in ways that regulators are only beginning to understand.
Alex 65 trillion dollars it sounds really scary but how scared should we be you know I think it's really misleading
I think when you put the word 65 trillion and missing in a headline you know it's bound to get a lot of
attention um you know but we talked to sources all day and people in the markets who know
more than me certainly and they're like this is nothing you know the FX swaps Market is really big but I think if
you're the bank for international settlements you're the central Bankers Bank there are a lot of questions in
these reports and in this review that they issued today primarily you know what I look at and been thinking about
all day is okay bis like you're saying there's money missing well let's look at how decades-long Central Bank
intervention monetary stimulus quantitative easing whatever you call it yeah what kind of impact that has had on
the world in the markets and how they've changed I think the other thing that you need to think about if your Regulators
around the world is what role has the Libor transition played in this yeah because I think that's something a lot
of yeah the transition the transition though that will never end apparently I know it
is I'm looking for that Sunset to come here so we can stop talking about it I am
though in all seriousness though I mean it's easy to sort of say okay this isn't really missing that maybe bis is being a
little dramatic but there is a broader issue here about a bank or at least an organization that is supposed to sort of
monitor Financial stability and there's concerns that a lot of this money it isn't just like we're not just talking
about debt we're talking about the derivatives contracts and it swaps and other things tied to them can't be
easily aggregated can't be easily monitored so they have no idea whether this debt is good or bad well exactly
and I think the other issue with this and this is why I point out the Libor transition is the Libor transition has
moved all these Global all these all these countries have moved to a what's called a risk-free rate so it's it's
backed by like secured collateral so like in the US for instance sofa is backed by the repo Market transactions
and those are considered to be a lot safer than what was underlying Libor if anything at all so when you move you've
essentially fixed your wrist yeah and so a lot of that risk has shifted out of these markets and I don't think they
quite understand the impact that the the Libor transition is having you know from a global standpoint I think you need to
put the risk of shifted out of the market right yeah but isn't that their concern is that there's now this Shadow
Market I put that in quotation marks that they basically don't have any real pervy well in the shadow base
always existed I mean if you think about it shuttle banking systems psychologists
but money market funds are technically a shadow bug component of the Shadow banking system I mean the definition
like according to zolten poser is you know anything that's not a U.S Commercial Bank so therefore money
market funds are technically a shadow Bank um you know so all this risk has been
shifted to these other areas and so that's what I think they need to figure out the other thing is that the
derivatives market and they acknowledge this in the Libor section in this review is that derivatives the library
transition actually dented they say dented derivatives trading so forward rate agreements you know things that are
are tied that you you would do between currencies have actually fallen off because of that shift in Risk they don't
need to do that anymore and these are the things that everyone's going to need to assess that it's like okay great we
got to the end of Libor but I don't think anybody truly understands the way in which the the market risk has shifted
here by essentially fixing rates where we don't have those credits sensitive rates anymore and I I think this is what
we're going to be studying for years to come that it's not just the end of Library this is going to have effects
that are going to be felt and we're going to learn well Alex I want to quickly go back to that big scary number
like you said there's a lot of asterisks there's a lot of nuances here around 65 trillion dollars but when does this if
we game plan this out if we step into hypothetical land what would actually cause the domino effect where this turns
from a scary headline into actually something scary that's a great question and I'm I'm not even sure and I honestly
I don't think people quite understand I think ultimately we're looking at imbalances in the in the risks markets
you know we're looking really at balance sheets and this is where I call upon the bis that they really need to be looking
at this seeing as they're the central banks you know bank that that they need to understand that quantitative easing
has had so many repercussions and has shifted the risks in these markets and that's only something that they can
truly understand if they're willing to assess you know from you know how how the development markets have changed
No, market experts consider the $65 trillion figure dramatic and misleading. The real concern is not missing money but a fundamental shift in risk profiles due to the LIBOR transition and quantitative easing, creating a new, poorly understood risk environment that regulators are only beginning to assess.
The shift from LIBOR to risk-free rates like SOFR shifted risk out of markets because new rates are backed by secured collateral, reducing the need for credit-sensitive derivatives (e.g., forward rate agreements). This dented derivatives trading but created a new, poorly understood risk environment where rates are effectively 'fixed'.
Decades of quantitative easing reshaped markets by altering risk distribution, especially in derivatives and swaps that are difficult to aggregate or monitor. The BIS report suggests regulators haven't fully assessed how this created balance sheet imbalances across the global financial system.
The transition pushed risks into 'shadow banking' components like money market funds, which now carry risks previously in traditional banking. Regulators lack full visibility into this shadow market, making it hard to discern whether underlying debt is 'good or bad,' a blind spot that has historically led to crises.
A real crisis would stem from imbalances in risk distribution across markets, not the headline $65 trillion number. Key triggers include regulators' inability to understand how quantitative easing shifted risks and the BIS's need to assess changes in developed markets to truly grasp financial stability threats.
Regulators struggle because derivatives contracts and swaps, especially those shifted into shadow banking, cannot be easily aggregated or monitored. This lack of visibility into which entities hold what risk makes it difficult to assess systemic threats, as seen in past crises like FTX's collapse.
The report echoes themes from other analyses showing how systemic vulnerabilities can be obscured by sensational figures. Similar hidden risks—like those from derivative market stress, debt imbalances, and regulatory blind spots—are explored in related summaries on global economic forces and market maker models.
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