BIS warns rising debt and market shifts may complicate future crisis responses

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

He noted that 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 concerns about government finances. Hernández de Cos stated, 'If market dysfunction threatens financial stability or monetary transmission, central banks need to intervene. But when debt is high and public financing needs are large, even a well-designed operation can be interpreted through a fiscal lens.'

Hernández de Cos 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 under normal conditions, their use of leverage and market-based funding can amplify stress during crises. He cited the March 2020 'dash for cash' in U.S. Treasury markets and Britain’s 2022 gilt market crisis as examples.

The BIS chief praised the Bank of England’s response to the 2022 gilt market crisis as a 'blueprint' for using asset purchases as a crisis-fighting tool. However, he cautioned that such measures might not be credible in a larger, more persistent crisis. He also warned that advancements in online banking, social media, stablecoins, and AI could accelerate the speed of future crises, requiring quicker policy responses. 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.