Central bank backstops risk fuelling leverage and future crises

Macro
โดย Investing.com·GB·Read original
Summary · why it matters

Central banks may be encouraging excessive leverage and indirectly lowering government borrowing costs through emergency facilities designed to keep financial markets functioning, the Wall Street Journal reported in an analysis published on Saturday. The concern stems from central banks expanding their role beyond lending to struggling banks and becoming market makers of last resort during the financial crises of 2008 and 2020. Hedge funds are a key source of concern, with their US Treasury holdings reaching $2.4 trillion at the end of 2025, up from $600 billion a decade earlier, according to estimates from the Federal Reserve Bank of Dallas. Bank of England Chief Economist Huw Pill said mechanisms introduced to reduce financial vulnerability could create new weaknesses, and pointed to the Bank of England's temporary gilt purchases during Britain's 2022 pension-fund crisis as a better model. The challenge is designing facilities that restore market liquidity during emergencies without providing a standing guarantee that rewards excessive risk.

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