BIS Chief Warns Rising Debt Could Complicate Next Financial Crisis Response

The head of the Bank for International Settlements (BIS), Pablo Hernández de Cos, has warned that rising public debt and large fiscal deficits could complicate central bank responses to the next financial crisis. Speaking in Vienna, he noted that while central banks remain the first line of defense, their interventions may become more politically contentious due to elevated debt levels similar to those seen post-World War II.

Hernández de Cos highlighted that rapid central bank action has been crucial in past crises, but the current environment is different. High public debt and persistent financing pressures risk making market interventions appear as attempts to support government borrowing costs rather than stabilizing financial markets. He cited the Bank of England's 2022 intervention in the gilt-market crisis as a blueprint for future actions, emphasizing the need for clear communication and governance.

The financial system's evolution, particularly the growing role of non-bank institutions like hedge funds and asset managers, adds another layer of complexity. These entities can amplify market stress through leverage and forced selling, as seen in the 2020 US Treasury market and the 2022 UK gilt crisis. Technology, including digital banking and artificial intelligence, could further accelerate financial shocks, reducing the time available for central bank responses.

Hernández de Cos stressed that stronger regulation of non-bank finance and emerging technologies, along with global cooperation, is essential. He noted that central banks cannot act alone, emphasizing the need for governments to address fiscal vulnerabilities to prevent constraints on crisis management. The warning underscores that the next financial crisis may differ significantly from previous ones, making central bank interventions more contested and difficult.