BIS Chief Warns Rising Debt and Market Shifts Could Complicate Future Crisis Responses

The head of the Bank for International Settlements (BIS), Pablo Hernández de Cos, warned that rising public debt and shifting market dynamics could complicate central banks' ability to manage future financial crises. Speaking in Vienna, Hernández de Cos noted that while central banks have been crucial in stabilizing markets during past crises, their task may become more challenging due to high public debt levels and persistent budget deficits. He emphasized that distinguishing between market dysfunction and legitimate concerns over government finances could become increasingly difficult.

Hernández de Cos highlighted the growing influence of non-bank financial institutions, such as hedge funds and asset managers, which now hold significant amounts of government debt. While these institutions support market liquidity under normal conditions, their use of leverage and market-based funding can amplify stress during crises, as seen in the 2020 US Treasury market turmoil and the 2022 British gilt market crisis. He praised the Bank of England's response to the latter as a blueprint for effective crisis management, but cautioned that such measures might not be credible in larger, more persistent crises.

The BIS chief also pointed to advancements in online banking, social media, stablecoins, and AI as potential accelerants of future financial crises. Rapid information dissemination, including misinformation, could force policymakers to act more swiftly. He argued for stronger regulation of non-banks and emerging financial technologies to limit moral hazard and preserve the effectiveness of central bank tools. Hernández de Cos stressed the importance of global cooperation, noting that central bank swap lines remain critical for stabilizing the global financial system during acute distress.