Augustin Carstens sees a confluence of three forces that could ultimately pose a systemic risk to global financial stability

By Agustín Carstens, Stijn Claessens, and Klaas Knot*

Traders in financial markets have long been familiar with the witching hour that comes when stock options, index options, and index futures expire every quarter. Regulators have learned to live with the market-rattling episodes that follow it. But policymakers now face a different witch’s brew that has been bubbling up for years, and that could prove far more dangerous and harder to contain.

The first ingredient is the explosive growth of financial intermediation outside of the banking system (“non-bank financial intermediation”), comprising a sprawling universe of private credit funds, hedge funds, money-market vehicles, and insurance-linked structures. Many operate, in part, like banks but with minimal oversight from a financial-stability perspective.

The second ingredient is the relentless rise in public debt across major economies, compounded by geopolitical fragmentation and rising tensions that leave little room for policy error.

The last part of the recipe is stalled implementation—or outright reversal in some jurisdictions—of the regulatory reforms enacted after the 2008 financial crisis.

In a new G30 report, we show how these components have become a combustible mix. While we do not predict an imminent crisis—the timing of such events is impossible to call—we do find that warning signs are multiplying, and the window for preventive action is narrowing.

The strains are most visible in private credit, because retail redemptions at publicly listed funds are accelerating and generating headlines. As the stock prices of various business development companies fall, sponsors are being called upon to prop up their lending vehicles.

True, the amount of money involved so far remains manageable, and the investor base is diverse enough to absorb losses from past excesses. But spillovers into the banking system are inevitable, as we know from the 2021 collapse of Archegos, a $10 billion family office, and Greensill, a supply-chain-finance firm that failed as a result of the risky loans it had made. While some lenders took the right lessons from these episodes, others, evidently, did not, as the bankruptcies of First Brands, an auto parts group felled partly by off-the-books shadowy non-bank financing, and the subprime auto lender Tricolor show.

The opacity of private credit makes matters worse. The data on such lending disclosed to supervisory agencies and the public tend to be meager and of poor quality. All too often, regulators and markets alike are navigating blind.

But the deeper vulnerability lies in core sovereign bond markets, which ultimately pose a much larger and more systemic risk to the global financial system. The volumes being issued and absorbed by investors here have reached staggering levels.

Between 2008 and 2021, central-bank purchases accounted for 63% of the increase in G7 sovereign debt; but this support has since been removed. With central-bank balance sheets being unwound and commercial banks’ capacity stretched, absorbing the growing overhang falls to fickle non-bank lenders.

This is not a hypothetical concern. On multiple occasions in the past decade, shocks to hedge funds, large margin and collateral calls, as well as liquidity shortfalls at investment funds, have tipped core bond markets into dysfunction. The crisis triggered by former UK Prime Minister Liz Truss’s unfunded 2022 tax-cutting budget provides a glaring example. Central banks have been forced several times to intervene with massive liquidity injections to prevent systemic collapse.

But such interventions often cause serious adverse side effects that leave central banks reluctant to step in again. This is particularly true when the inflation outlook does not call for monetary easing.

What can be done? The regulatory and supervisory progress that has been made since 2008 is real, but incomplete. The most important task now is to maintain robust regulation and rigorous supervision.

That means stress-testing not just banks but other systemically important parts of the financial system to identify vulnerabilities. It also means making better use of data. Dangerous exposures can often be revealed by using information that supervisors already have, but agencies need to do a better job of sharing what they know across mandates and borders.

As for financial leverage, the case for action is clear. There is no good reason to allow hedge funds to trade at levels 200 times their own money, or with haircuts as low as 50 basis points (and sometimes negative). Minimum margin and haircut requirements should be imposed, and oversight strengthened, not relaxed.

Additionally, the infrastructure underpinning US Treasury markets—the deepest and most systemically important in the world—needs urgent attention. While calls for more robust trading and settlement systems have been heard for years, progress has been minimal.

Make no mistake: the current combination of elevated risk, deregulatory momentum, and limited international cooperation makes timely preventive action unlikely to be sufficient. Financial authorities must plan for a crisis and remedial action, not merely hope to forestall it.

Here, there is room for cautious optimism. The world’s major central banks have demonstrated considerable ingenuity in moments of crisis. If they design liquidity facilities for non-bank institutions in advance, they will stand a better chance of providing targeted support, rather than repeating the open-ended interventions of the past.

Such facilities must come with strict access conditions, careful pricing, and firm sunset provisions. The Bank of England’s Contingent Non-Bank Financial Institution Repo Facility offers a useful template.

But none of this can happen without political will, ideally exercised cooperatively across the major jurisdictions. That may sound like wishful thinking in today’s fragmented environment. But it is a small price to pay for breaking the boom-and-bust cycle, and a far smaller one than the cost of beating back the next financial storm.

*Agustín Carstens, a former governor of the Bank of Mexico, is a former general manager of the Bank for International Settlements. Stijn Claessens is Executive Fellow at the Yale School of Management. Klaas Knot, a former president of the Dutch Central Bank and a former chairman of the Financial Stability Board, is a distinguished visiting fellow at the Peterson Institute for International Economics. Copyright 2026 Project Syndicate. Used with permission.