ContextAnnual SUERF lecture in Vienna, hosted with the Austrian central bank and the Yale Program on Financial Stability; the BIS serves central banks worldwide and must help them prepare for fast-moving crises.
Why it mattersExamines how high public debt, non-bank finance and digital runs could change what central banks can and should do in a crisis.
- High government debt could complicate crisis management by central banks.
- The growing footprint of non-bank institutions creates risks outside the banking rulebook.
- Digital innovation and social media speed up liquidity runs.
- Close regulatory gaps so that similar risks face comparable rules and safeguards.
- Avoid expecting central banks to rescue unregulated risks, to limit moral hazard.
- Adapt liquidity tools and communication to faster stress.
Read the speech summary
1. The question
In the SUERF annual lecture in Vienna, BIS General Manager Pablo Hernández de Cos asked how changes in public finances, market structure and technology will alter what central banks can and should do when the next financial crisis hits.
2. What recent crises taught
From the global financial crisis, the euro debt crisis and the pandemic, he draws three lessons. Central banks were decisive: standing and emergency liquidity, emergency loans and bond buying stopped fire sales and restored key funding markets. Credibility mattered as much as money: in several cases simply announcing purchases, or offering lending that banks barely used, was enough to calm markets. But each success exposed limits. Bond-buying programmes were hard to size and explain when nobody knew how long a shock would last, and some meant to fix temporary dysfunction turned into lasting stimulus, making exit harder. And lending directly to firms, markets or non-banks during the pandemic, beyond the usual banking circle, exposed central banks to credit risk and blurred the line with government support.
3. Three forces that complicate the next crisis
High public debt: with debt near post-war peaks and large deficits, sovereign bond markets react more to fiscal doubts, and it becomes harder to tell whether rising yields reflect fiscal concerns or a market malfunction; even a well-designed intervention may then look like help for governments. Non-banks: funds and other non-bank institutions now own the largest share of rich countries' government bonds, and highly leveraged traders like hedge funds have become central go-betweens in those markets. Their short-term funding and leverage can turn fiscal news into sudden sales, as in the dash for cash of March 2020 and the British pension-fund episode of 2022, creating what the BIS calls a fiscal-financial stability nexus. Since they usually cannot borrow from the central bank, support has to take the form of asset purchases, and widening access without comparable regulation would invite moral hazard. Digital innovation: online banking and social media made the 2023 deposit runs unusually fast and let rumours spread before official messages; stablecoins could transmit stress to money markets if they had to dump reserve assets; and widespread use of similar AI models may make market reactions more synchronised.
4. Responses he proposes
He calls for a layered answer. Governments should put debt on a credible path and build buffers in good times, which reduces both the need for central bank action and the suspicion that it serves fiscal ends. Regulators should keep refining bank rules, for example by assuming faster deposit outflows and making sure banks are operationally ready to use central bank facilities, and should apply similar rules to institutions posing similar risks, whatever their legal form; options include more central clearing of government bond and repo trades, with its own risks, and well-targeted minimum haircuts to curb leverage. Central banks should design backstops that are cheap enough in stress to avoid stigma but unattractive in normal times, keep market-repair purchases clearly separate from monetary stimulus, as the Bank of England did with its time-limited 2022 operation, and set exit conditions in advance for quantitative easing. Finally, he stresses international cooperation on standards and data for non-banks, central bank swap lines for dollar funding stress, and coordinated communication, with the BIS acting as a hub.