Breeden flags private markets, sovereign debt as new risks

Ms Sarah Breeden, Deputy Governor for Financial Stability of the Bank of England, noted that the global financial system has demonstrated resilience against six major shocks in the past six years, including a pandemic, the war in Ukraine, and severe stress in the UK gilt market.

This resilience, she emphasized, is not accidental but a result of lessons learned from the global financial crisis, leading to significantly higher capital and liquidity in banks.

Macroprudential tools also lean against risk build-up.

However, Breeden warned that while parts of the system are stronger, overall resilience is not guaranteed as activity has migrated from banks to market-based finance, now accounting for about half of UK and global financial-sector assets.

Risk has also shifted towards sovereign balance sheets, with public debt in advanced economies near post-war highs, reducing fiscal space and increasing sensitivity to market confidence shifts.

Breeden highlighted three salient vulnerabilities.

First, private markets have grown six-fold to $18 trillion by 2025, remaining untested at this scale in a higher-rate environment.

These markets are characterized by limited transparency, lagging valuations, and complex, layered leverage, making losses hard to trace.

Recent defaults and redemption pressures underscore these concerns.

Second, leverage in government bond markets, particularly from hedge funds pursuing similar strategies, has reached record levels in UK gilts.

These price-sensitive, leveraged investors can amplify shocks and cause jumps to illiquidity, a risk observed across many advanced economies.

Third, stretched asset valuations, especially in the US technology sector linked to artificial intelligence, persist despite a materially uncertain macroeconomic outlook.

A reassessment of future earnings potential could lead to abrupt price declines and raise questions over debt repayment.