BIS 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, he emphasized the critical role central banks have played in recent crises but noted that high public debt and persistent budget deficits make their interventions more challenging.

Hernández de Cos highlighted that distinguishing between market dysfunction requiring intervention and legitimate investor concerns over government finances is becoming harder. He also pointed to the growing influence of 'non-bank financial institutions' like hedge funds and asset managers, which, while supporting liquidity, can amplify stress during market turmoil, as seen in the 2020 US Treasury market crisis and the 2022 UK gilt market crisis.

The BIS chief praised the Bank of England’s response to the 2022 gilt market crisis as a blueprint for effective crisis management, emphasizing the importance of limited purchase windows, clear communication, and strong governance. However, he cautioned that such measures might not be credible in larger, more persistent crises.

Additionally, Hernández de Cos warned that advancements like online banking, social media, stablecoins, and AI could accelerate future crises. He called for stronger regulation of non-banks and emerging financial technologies to limit moral hazard and preserve the effectiveness of central bank tools. Global cooperation and central bank swap lines remain crucial for stabilizing the financial system during acute distress.