BIS Chief Warns Central Banks Face Tougher Crisis Management Challenges
Central banks will continue to play a pivotal role in managing financial crises, but their task is becoming more challenging due to rising public debt, large fiscal deficits, and rapid financial market changes, according to Pablo Hernández de Cos, the head of the Bank for International Settlements (BIS). Speaking in Vienna, Hernández de Cos emphasized that past crises have shown the necessity of swift central bank action to contain market turmoil. However, he warned that the environment for the next crisis is evolving, with public debt in many economies nearing post-World War II levels and government deficits remaining high.
The BIS chief also highlighted concerns from global bond markets, where rising yields and widening gaps between French and German government bond yields have revived fears of a eurozone debt crisis. He noted the growing influence of non-bank financial institutions, such as hedge funds and asset managers, which now hold significant government debt. While these institutions support market liquidity under normal conditions, their leverage and reliance on market-based funding can exacerbate stress during severe volatility, as seen in the 2020 US Treasury market turmoil and the 2022 UK gilt market crisis.
Hernández de Cos pointed to the Bank of England's response to the 2022 gilt market crisis as an example of effective crisis management through asset purchases. However, he cautioned that such interventions could lose credibility during larger, more prolonged crises. He also warned that technological advancements, including online banking, social media, stablecoins, and artificial intelligence, could accelerate the development of future financial crises, requiring faster policymaker responses.
The BIS chief stressed the need for stronger regulation of non-bank financial institutions and emerging financial technologies to mitigate moral hazard and ensure central banks retain effective crisis-management tools. He underscored the importance of international cooperation, particularly during acute financial stress, to stabilize the global financial system.