The financial system is still more vulnerable than it appears and central banks may end up being forced to deviate from their aggressive path to fighting inflation. This is how the Bank for International Settlements (BIS), the bank of banks, sees in its quarterly report a risk that cannot be seen on balance sheets. In general, the financial system is seen in stable conditions due to the regulatory reforms that followed the great financial crisis of 2008 and 2009. You are aware of the strong capital reserves that banks have to accumulate to face difficult times, and in this aspect we can rest easy. But Claudio Borio, chief economist at the Basel-based Bank for International Settlements, worries about unregulated or poorly regulated participants in the financial market. They are referred to as non-bank financial intermediaries, as the informal term “shadow banks” is also used. The Bank for International Settlements counts among these financial intermediaries not only hedge funds, some of which have risky investment strategies, but also large capital reserves such as insurance companies or pension funds, which add according to their accounts up to 80 billion euros of debt that the Bank considers International risk to financial stability. The prolonged phase of ultra-low interest rates has intensified the search for yield, leading to high levels of accumulated debt across the spectrum of financial market participants. Combined with a rapid rise in interest rates, this can easily lead to a decrease in liquidity which may in turn limit the ability of the markets to function. At this point, central banks will only have to take measures such as bond purchases that would act as a counterbalance to their current restrictive monetary policy. For example, the central bank supervisor looks at the turmoil in the UK government bond market last September. At the time, the UK government’s plans to cut taxes and energy subsidies caused budget concerns and a sell-off in the currency and bond markets. This left UK pension funds in a bind and the Bank of England had to buy its way out of bonds, which in turn sent yields down again. This is why the continued high level of debt is a challenge for central banks, which have to rein in inflation by raising interest rates. In March 2020, at the height of the pandemic crash, when hedge funds found themselves in a bind in the US government bond market, turmoil endangered financial stability there and could only be avoided in the stock market. The largest securities in the world through the intervention of the US Federal Reserve. In the Central Banks Triennial Monitoring Review for 2022, released at the end of October, the Director of Central Banks’ Foreign Reserves has already indicated the risks posed by changes in trading patterns and market structures. The $80 trillion debt blind spot arises from currency exchanges (swaps) and is not included in the balance sheets of the institutes or companies involved. More information The Federal Reserve has agreed to raise interest rates for the sixth time in six months and is pushing the European Central Bank to continue making financing more expensive in Europe Among these risks, non-bank entities outside the US account for $26 trillion, while non-US banks are limited Access to the Fed’s account is $39 trillion, more than double the $15 trillion debt shown on balance sheets. The Bank for International Settlements’ hidden debt estimates exceed dollar stocks of Treasuries, repurchases and commercial paper combined, while trade flow reached $5 trillion per day in April, two-thirds of the currency’s daily turnover.