Central Banks Warned of Tougher Crisis Management Amid Rising Public Debt
Central banks are facing a more challenging role in managing financial crises as public debt levels soar, fiscal deficits widen, and financial markets evolve rapidly. Pablo Hernández de Cos, the head of the Bank for International Settlements (BIS), highlighted these concerns during a speech in Vienna. He noted that while central banks have been crucial in swiftly containing market turmoil over the past two decades, the changing environment could make their interventions more difficult and politically contentious.
Hernández de Cos pointed out that public debt in many economies is approaching post-World War Two levels, with elevated government deficits and persistent fiscal pressures. This situation could complicate central banks' ability to distinguish between legitimate investor concerns about government debt sustainability and actual market stress requiring intervention. Rising global bond yields and widening gaps between French and German government bond yields have added to these concerns, reminiscent of the eurozone debt crisis.
The BIS chief also emphasized the growing influence of non-bank financial institutions, such as hedge funds and asset managers, which now hold significant amounts of government debt. While these institutions support market liquidity under normal conditions, their reliance on market-based funding and leverage can amplify stress during severe volatility, as seen in the 2020 US Treasury market turmoil and the 2022 UK gilt market crisis. He cited the Bank of England's response to the 2022 gilt market crisis as an example of effective crisis management through targeted asset purchases and clear communication.
Looking ahead, Hernández de Cos warned that technological advancements, including online banking, social media, stablecoins, and artificial intelligence, could accelerate the development of financial crises. Rapid information spread and online withdrawals may force policymakers to act faster than before. He stressed the need for stronger regulation of non-bank financial institutions and emerging financial technologies to mitigate moral hazard and ensure central banks retain effective crisis-management tools. International cooperation, particularly through central bank currency swap arrangements, will remain critical during periods of acute financial stress.