BIS warns rising debt could complicate future crisis response

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BIS warns rising debt risks

Highlights

BIS General Manager Pablo Hernández de Cos warns that near post-World War Two highs in public debt could hinder central banks' crisis interventions by making it harder to distinguish genuine market dysfunction from fiscal concerns.
Non-bank financial institutions such as hedge funds, pension funds, and asset managers now hold a greater share of government debt and, due to leverage and market-based funding, could amplify financial stress in future crises.
Hernández de Cos states that digital technologies like online banking, social media, stablecoins, and AI could accelerate crisis dynamics, highlighting the need for stronger regulation and continued central bank cooperation.

Debt burdens reshape crisis playbook

As reported by Reuters, BIS General Manager Pablo Hernández de Cos says central banks remain central to containing market turmoil, but the environment for future interventions is shifting as public debt levels stay near post-World War Two highs in many economies.

Speaking in Vienna on Monday, he says the crises of the past 20 years show the value of rapid central bank action. But large budget deficits and persistent fiscal pressures could make it harder for policymakers to separate genuine market dysfunction from investor concern about government finances.

Hernández de Cos says central banks need to intervene when market dysfunction threatens financial stability or monetary transmission. He adds that when debt is high and public financing needs are large, even well-designed operations can be viewed through a fiscal lens.

The warning comes as global bond yields rise sharply and the spread between French and German government borrowing costs widens, reviving memories of the euro zone debt crisis.

Non-bank risks and faster shocks

Hernández de Cos also points to the growing influence of non-bank financial institutions, including hedge funds, pension funds and asset managers, which now hold a larger share of government debt. While these investors support liquidity in normal conditions, their use of leverage and market-based funding can amplify stress during periods of turmoil, he says, citing the March 2020 dash for cash in U.S. Treasury markets and the UK gilt market crisis in 2022.

He says the Bank of England's intervention offers a blueprint for crisis asset purchases, with tightly limited purchase windows and amounts, backed by clear communication and governance. Even so, he warns that in a larger and more persistent crisis, that kind of commitment might not remain credible.

Online banking, social media, stablecoins and AI could also accelerate future crises by speeding withdrawals and the spread of information, including misinformation, he says. Hernández de Cos argues that stronger regulation of non-banks and emerging financial technologies, along with continued global cooperation and central bank swap lines, will be needed to preserve the effectiveness of crisis-response tools.

In our earlier article on France’s public-finance concerns, we explained how rising scrutiny of the country’s large state and social-security burden has reignited eurozone debt-crisis nerves. We also noted that the pressure has looked more like a gradual squeeze than a sudden rupture, while the widening spread between French and German borrowing costs has been a key signal markets are watching for potential spillovers.

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