Rapidly growing turnover in the foreign exchange market, which last year reached an average of $1.23 trillion a day, is ringing alarm bells at the Bank for International Settlements.
In a recent report, the so-called central bankers' central bank calls on the banking community to start reducing settlement risk fast - despite the cost.
And it warned that it would monitor developments over the next two years "to determine the need for further action."
"It is important for the safety and soundness of the world's financial systems," William J. McDonough, president of the Federal Reserve Bank of New York and chairman of the committee of central banks from the Group of 10, told a press conference here.
Mr. McDonough suggested that many banks are unaware of the extent of risk they are taking in the foreign exchange market; "98% of resolving the problem" will be an education campaign, he said.
The findings of the report, which surveyed 80 major banks, appear to have taken the BIS by surprise.
The report not only found that foreign exchange exposures were larger and much longer than expected in a market that is open 24 hours a day, Monday through Friday, but also showed that, with many billion dollars a day flowing through settlements systems around the world, it is easy for banks to find their exposure exceeding their capital.
The BIS called for both individual and joint action. Banks should look to alleviating their exposure by improving back-office payments processing, correspondent banking arrangements, netting capabilities, and risk management controls, it said.
