BIS Chief: Soaring Debt and Market Shifts Pose New Crisis Management Challenges
Central Banks Face New Obstacles in Future Financial Crises
By Marc Jones
LONDON, Oct 5 (Reuters) - Central banks will remain at the heart of managing future financial crises, but rising public debt and other key changes could make their task more difficult and controversial, the head of the Bank for International Settlements (BIS) said on Monday.
The Evolving Role of Central Banks
Speaking in Vienna, Pablo Hernández de Cos - one of the frontrunners to take over from Christine Lagarde as European Central Bank President next year, said the run of crises over the last 20 years had demonstrated the importance of swift central bank action in quelling market turmoil.
Changing Crisis Backdrop
However, he said the backdrop for the next crisis was changing rapidly. Public debt levels are near post-World War Two highs in many economies, while budget deficits remain large and fiscal pressures are expected to persist.
That could make it harder for central banks to distinguish between market dysfunction requiring intervention and legitimate investor concerns over government finances.
Challenges of High Debt and Fiscal Pressures
"If market dysfunction threatens financial stability or monetary transmission, central banks need to intervene," Hernández de Cos said.
"But when debt is high and public financing needs are large, even a well-designed operation can be interpreted through a fiscal lens".
Crisis-Management Tools and Market Dynamics
CRISIS-MANAGEMENT TOOLS
The BIS chief's warnings come amid a sharp recent rise in bond yields globally and as an explosion of the 'spread' - or gap - between French yields and those of triple-A rated Germany, stirs memories of the euro crisis.
The Role of Non-Bank Financial Institutions
Hernández de Cos also highlighted the growing influence of so-called 'non-bank financial institutions' such as hedge funds, pension funds and asset managers, which have become major holders of government debt.
While they support market liquidity in normal times, their use of leverage and market-based funding can amplify stress during periods of turmoil, he said, pointing to the March 2020 "dash for cash" in US Treasury markets and Britain's 2022 gilt market crisis as evidence.
Lessons from Recent Market Crises
He said the Bank of England’s response "offers a blueprint" for how central banks should use asset purchases as a crisis-fighting tool.
Strictly limited purchase windows and amounts as well as clear communication and governance mechanisms worked well, he said, although he also warned that in a bigger and more persistent crisis, "such commitment might not be credible".
Technological Shifts and Future Risks
He added that online banking, social media, stablecoins and AI could all increase the speed of future crises. Rapid online withdrawals and the fast spread of information, including misinformation, could force policymakers to respond more quickly than in the past.
Regulation, Cooperation, and the Path Forward
He argued that stronger regulation of non-banks and emerging financial technologies would be needed to limit moral hazard and preserve the effectiveness of central bank crisis-management tools.
"Central banks have a key role to play, but so do regulators and governments," Hernández de Cos said, adding that "global cooperation" also remained crucial.
"Central bank swap lines remain critical to stabilise the global financial system at times of acute distress."
(Reporting by Marc Jones; Editing by Toby Chopra)