Non-bank finance growth introduces systemic stability risks
Bank of Canada Governor Tiff Macklem warned about growing systemic vulnerabilities in the financial system. He cited leveraged trading by hedge funds in government bond markets and the rapid growth of private credit as key concerns, emphasizing the need to close data gaps.
Risks migrate to non-bank finance
Despite healthy global growth, risks are tilted to the downside due to geopolitical conflicts and elevated uncertainty about US trade policy.
Fiscal flexibility is limited by high sovereign debt, and equity and credit markets show compressed risk premiums and stretched valuations, raising the risk of sharp reversals.
Following the 2008–09 global financial crisis, strengthened bank regulation led to riskier activities migrating to non-bank financial intermediaries.
This growth in market-based finance has brought benefits, but risks have migrated.
Global surveillance and regulatory frameworks have not kept pace, as oversight built for banking struggles with non-bank players' different reporting and monitoring requirements, posing a challenge for regulators and central banks.
Leverage in sovereign debt and private credit
Hedge funds' highly leveraged trading in sovereign debt, funded through short-term repo, poses systemic risks.
Forced unwinding during stress can cause severe market dislocations, as seen in the 2020 'dash for cash' and the 2022 UK gilt crisis.
Private credit, non-bank lending to firms, has also expanded globally, filling financing gaps.
Its opacity, limited history through downturns, and liquidity mismatches make risk assessment challenging.
Interconnections with banks mean private credit weaknesses could spill back to the regulated sector, especially cross-border.
New risks, old blind spots
This speech critically highlights growing blind spots in financial oversight as risks migrate to less regulated non-bank sectors.
Identified vulnerabilities in leveraged sovereign debt trading and opaque private credit demand urgent attention, especially given cross-border interconnections.
Effective mitigation requires enhanced data, improved infrastructure, and stronger international coordination.