BIS Warns Central Banks Face Rising Hurdles in Crisis Response

Bank for International Settlements (BIS) General Manager Pablo Hernández de Cos warned that central banks will face growing challenges in responding to financial crises due to expanding public debt and shifting market structures. Speaking in Vienna, he emphasized that while central banks remain crucial in stabilizing markets, rising debt levels and fiscal deficits complicate their ability to intervene effectively. He noted that bond yields are surging globally, with the spread between German and French 10-year yields reaching 125.90 basis points last week, the highest since June 2012, reigniting concerns similar to the eurozone crisis.

De Cos highlighted the risks of central bank actions being misinterpreted as fiscal support, especially when debt levels are high and public financing needs are large. He also addressed the growing role of non-bank financial institutions, such as hedge funds and asset managers, which provide liquidity in normal times but could amplify stress during crises. He cited the U.S. Treasury market turmoil in March 2020 and the U.K. gilt market crisis of 2022 as examples, noting that the Bank of England’s response set a useful precedent but may not be sufficient for larger, more prolonged crises.

The rapid evolution of online banking, social media, stablecoins, and artificial intelligence further complicates the landscape, as these technologies can accelerate the speed of future crises. De Cos stressed the need for stronger regulation of non-banks and emerging financial technologies to maintain the effectiveness of central bank tools. He also underscored the importance of international coordination, particularly through central bank swap lines, to stabilize the global financial system during periods of severe stress.