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

The head of the Bank for International Settlements (BIS), Pablo Hernández de Cos, warned that rising public debt and market changes could complicate central banks' ability to manage future financial crises. Speaking in Vienna, he noted that while central banks have been crucial in stabilizing markets during past crises, the current economic landscape presents new challenges.

Public debt levels are near post-World War II highs in many economies, with large budget deficits and persistent fiscal pressures. This makes it harder for central banks to differentiate between market dysfunction requiring intervention and legitimate investor concerns over government finances. Hernández de Cos emphasized that even well-designed operations could be misinterpreted through a fiscal lens.

He also highlighted the growing influence of non-bank financial institutions, such as hedge funds and asset managers, which have become major holders of government debt. While these institutions support market liquidity in normal times, their use of leverage and market-based funding can amplify stress during periods of turmoil, as seen in the 2020 US Treasury market crisis and the 2022 British gilt market crisis.

Hernández de Cos praised the Bank of England's response to the gilt market crisis as a blueprint for central bank crisis management, noting the importance of limited purchase windows, clear communication, and strong governance mechanisms. However, he cautioned that such measures might not be credible in a bigger or more persistent crisis.

Additionally, he warned that advancements in online banking, social media, stablecoins, and AI could accelerate the speed of future crises. Rapid online withdrawals and the fast spread of information, including misinformation, could force policymakers to respond more quickly than in the past. Hernández de Cos stressed the need for stronger regulation of non-banks and emerging financial technologies to limit moral hazard and preserve the effectiveness of central bank tools.