In her speech, Sarah Breeden, the Bank of England’s Deputy Governor for Financial Stability, assesses the current state of the global financial system against a backdrop of significant geopolitical and economic shocks.
She begins by acknowledging that while the system has shown remarkable resilience over the last six years, weathering a pandemic, wars, and energy crises, history teaches that financial stability is often undermined when optimism overrides caution.
She credits much of this current stability to the structural reforms implemented after the 2008 global financial crisis, particularly the increased capital and liquidity held by banks. However, she cautions that risk has not disappeared but has instead migrated into less transparent and less regulated areas.
Breeden identifies three specific vulnerabilities that currently mirror the warning signs of past crises: the rapid growth and opacity of private markets, the high levels of leverage in government bond markets driven by hedge fund activity, and stretched asset valuations in sectors like artificial intelligence.
She expresses concern that these private credit markets have not yet been tested by a major macroeconomic shock in a high-interest-rate environment. Furthermore, she notes that public debt is at post-war highs, which reduces the fiscal space for governments to respond to future disruptions.
The combination of leverage, complexity, and concentration in these areas suggests that while the banking core is strong, the wider system remains fragile. She also adds that the conflict in the Middle East raises the odds that these vulnerabilities could crystallise at the same time.
To address these shifting risks, Breeden outlines a strategy focused on system-wide surveillance rather than just monitoring individual institutions. This includes conducting stress tests on non-bank financial sectors and private markets to understand how shocks might propagate through the real economy.
She also highlights the need for international cooperation and the development of new tools, such as the Contingent NBFI Repo Facility, which allows the central bank to provide liquidity directly to insurance companies and pension funds during market dysfunction.
Ultimately, Breeden concludes that while the system is better prepared than in the past, the “echoes” of previous crises are present, and the Bank’s role is to ensure these emerging risks are not dismissed during periods of relative calm.
