BIS General Manager Warns Central Bank Crisis Response Growing More Complicated by Rising Debt
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Bank for International Settlements General Manager Pablo Hernandez de Cos said on the 5th that central banks will continue to play a central role in responding to financial crises, but that rising public debt and changing market conditions will make their task more difficult and more controversial. In a speech in Vienna, he noted that public debt in many countries and regions is approaching its highest level since World War II and fiscal deficits remain large, which could make it harder for central banks to distinguish between market dysfunction and investors' legitimate concerns about government finances. Referring to the sharp rise in bond yields globally and the spread between German and French 10-year bond yields reaching 125.90 basis points last week, the highest level since June 2012, he said, "When market dysfunction threatens financial stability or the transmission of monetary policy, central banks need to intervene," while adding, "When debt levels are high and public funding needs are large, even well-designed measures may be interpreted from a fiscal perspective." He also mentioned the growing influence of non-bank financial institutions such as hedge funds, pension funds and asset managers, noting that they have become major holders of government bonds. While they support market liquidity in normal times, leverage and market-based funding can amplify stress during periods of turmoil, he said, citing the dash for cash in the U.S. Treasury market in March 2020 and the UK gilt market crisis in 2022 as evidence. De Cos is seen as one of the leading candidates to succeed European Central Bank President Christine Lagarde, whose term ends next year.