The next financial crisis may start outside the banks

24th September 2026 

Key takeaways 

•    Systemic risks related to nonbank financial intermediation (NBFI) are increasing and  “perfect storm” is brewing as a growing NBFI combines with high public and private debts. 
•    Its large liquidity mismatches, high leverage, and interconnectedness have in recent decades led to liquidity spillovers to core bond markets and losses at banks. 
•    Key preventive actions needed include reducing excessive NBFI-borrowing and mismatches, strengthening financial infrastructure, maintaining limits on counterparty exposures, enforcing strict supervision, and expanding stress tests. 
•    Remedially, central banks should design tools to provide liquidity to select NBFI activities and entities, reducing reliance on broad interventions, and adapt the global financial safety net.

1. The greatest threats to financial stability today may no longer lie within the banking system. 

Since the global financial crisis (GFC), banking systems have been strengthened. But growth in nonbank financial intermediation (NBFI) has been high and related risks are increasing fast.

NBFI comprises a sprawling universe of private credit funds, hedge funds, money-market vehicles, and other investment funds, and insurance-linked structures. It now accounts for more than half of global financial intermediation. It brings real benefits by diversifying funding sources, broadening access to finance, and encouraging competition and innovation.

But, as a recent G30 report argues, its rapid growth means NBFI has become a financial stability worry. While the report does not predict an imminent crisis—the timing of such events is impossible to call—it does find that a “perfect storm” may be brewing as warning signs are multiplying at the same time, with core bond markets becoming more vulnerable and the window for preventive action narrowing. 

Warning signs have been increasing.

There are three ingredients that make for a combustible mix. First, NBFI’s growth has intensified its vulnerabilities through high leverage, large liquidity mismatches, and tight links to core bond markets and banks. Many NBFI intermediaries and activities operate partly like banks, yet with minimal oversight from a financial-stability perspective.

The second ingredient is the relentless rise in public debt across major economies. Years of highly expansionary fiscal and monetary policy in advanced economies have left the global financial system more exposed. These vulnerabilities are now compounded by shifting geopolitics, growing fragmentation in trade and finance, and new conflicts. These are heightening uncertainty, making market volatility and stress more likely. At the same time, rising fragmentation and tensions make stresses harder to contain, leaving little room for policy error.

The last ingredient is the stalled implementation of the regulatory reforms enacted after the 2008 financial crisis or outright reversal in some jurisdictions. Almost 20 years after the GFC, Basel III has still not been adopted everywhere and implementation remains far from complete, yet pressure for relaxation grow stronger every day. With questions about the future direction of banking reform, risks, including from NBFI-related spillovers, increase.

2. There is broad agreement on the mechanisms by which NBFI can create financial instability: leverage and liquidity. 

As for crises in general, neither the timing nor the precise way in which NBFI could lead to a systemic event is known or predictable. But observers and policymakers agree on the main mechanisms through which financial stability concerns from NBFI can arise: adverse spillovers to banks from leverage-related defaults and to core bond markets from liquidity shortfalls. Table 1 summarizes these key mechanisms and provides key past and potential future examples.

Table 1: Conceptual framing and examples of systemic risk related to NBFI

While leverage in NBFI is generally less of a concern, private credit has become a worry. 

Much of NBFI uses instruments that immediately share asset-related risks with investors. Its entities often pool idiosyncratic risks at the intermediary level, passing only residual risks on to final investors. Many nonbank entities do not have very levered balance sheets. And insolvency-related losses are mostly shared over time with investors, beneficiaries, and other stakeholders, sometimes including fiscal authorities. Furthermore, NBFI is not core to the payment system. This makes individual nonbank failures less likely to have systemic consequences than bank failures typically do. Indeed, evidence shows that by acting as a “spare tire,” countries with more diverse financial systems, including more NBFI, often recover faster from banking crises and asset-price slumps.

Since the shadow-banking collapse during the GFC, nonbank insolvencies driven by high leverage have therefore remained relatively contained. Still, for some nonbank activities and entities, leverage can be high, and when stakeholders do not absorb losses smoothly, they can trigger systemic spillovers. Episodes such as the 2021 collapse of Archegos Capital Management, a $10 billion family office, and Greensill Capital, a supply-chain-finance firm that failed in 2021 because of the risky loans it had made, imposed significant losses on counterparty banks. While some lenders took the right lessons from these episodes, others evidently did not, as the recent bankruptcies of First Brands, an auto-parts group felled partly by off-the-books shadowy nonbank financing, and the subprime auto lender Tricolor show.

Private credit has been the latest NBFI segment in which vulnerabilities have been building. Large redemptions, falling prices of private credit funds, and related stresses last spring already exposed some of its structural weaknesses. Strains were highly visible as retail redemptions at publicly listed funds accelerated and generated headlines. As the stock prices of various business development companies fell, sponsors were called upon to prop up their lending vehicles. 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, markets are navigating blindly, increasing the risk of runs, as happened earlier this year. True, defaults have so far remained manageable, as the amounts involved were small enough and the investor base diverse enough to absorb losses from past excesses. But there were still spillovers to the broader financial system. And repeats remain possible.

Liquidity is generally more the concern related to NBFI.

Liquidity mismatches are large for many nonbank entities and imply risks of runs, as in the case of investment funds—money-market funds and other open-ended investment funds. Hedge funds, pension funds, and insurance companies can also face large margin and collateral calls, which can be triggered by many factors. With liquidity buffers limited and leverage acting as an amplifier, nonbanks can quickly face liquidity shortfalls. Yet banks are reluctant to extend liquidity to nonbanks in times of stress, and nonbanks typically lack access to central bank backstops. As nonbanks further unwind their positions, adverse feedback loops of falling asset prices follow that reinforce liquidity strains. Interconnections can transmit these liquidity stresses to banks, funding markets, and other core parts of the system. These spillovers can have adverse systemic effects, especially when they impair core funding markets, with adverse feedback loops.

The greatest vulnerability related to NBFI liquidity spillovers today lies in core sovereign bond markets, with ultimately a large and systemic risk to the global financial system. Between 2008 and 2021, central-bank purchases accounted for 63% of the increase in G7 sovereign debt. The volumes now being issued by sovereigns and having to be absorbed by investors have reached staggering levels. Central-bank support is no longer as their balance sheets are being unwound and commercial banks’ capacity is limited. With key past buyers now absent, absorbing the growing overhang falls to nonbank lenders, but some may prove to be less reliable sources of demand.

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’ unfunded tax-cutting budget of 2022 provides a glaring example. And in March 2020 and 2022 stresses threatened core markets. Each time, central banks had little choice but to intervene with massive liquidity injections. Those, however, reduced perceived funding risks, created moral hazard, and added to underlying vulnerabilities. The serious adverse side effects of such interventions, however, have often left central banks reluctant to step in again, particularly today when the inflation outlook does not call for monetary easing.

3. What can be done, preventive and remedial? 

The regulatory and supervisory progress made since 2008 is real, but incomplete. Despite long-standing recognition of NBFI fragilities, policy responses have remained limited. Securities regulators, focused mainly on investor protection, do not always weigh systemic risk as heavily as prudential authorities, and some remain too confident in market resilience. Repeated interventions have reinforced the perception that central bank support comes at little cost. Breaking this cycle will require strong, well-coordinated action.

The G30 report outlines a broad reform agenda of urgently needed more decisive preventive and remedial actions. On prevention, it would curb excessive leverage and asset-liability mismatches that can destabilize core bond markets. On resilience, the agenda would strengthen financial infrastructure and sovereign bond trading and settlement systems, where reform has long lagged. Remedially, it argues for better crisis preparedness and management.

More preventive actions are needed. 

The most important task is to maintain robust regulation and rigorous supervision. To prevent and contain solvency spillovers, authorities need to maintain counterparty exposure limits, enforce stricter supervision of key institutions, and expand stress tests to capture interconnections. It also means stress-testing not just banks but other systemically important parts of the financial system to identify vulnerabilities.

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.

The tasks also include making better use of existing data and obtaining better data. Many risky exposures can already be inferred from information held by individual supervisors; missing is adequate data sharing across mandates and borders. But more and better data are essential too. The complexity and opacity of NBFI reflects in part limited, poor-quality data, which hampers timely risk assessment and makes stress episodes harder to contain. Authorities should improve data quality and transparency. The Bank of England’s 2025 system-wide exploratory scenario exercise (SWES) focused on private credit and the recently announced Federal Reserve Banks of Dallas and New York pilot survey exploring lending trends in the U.S. private credit direct lending market are good public sector initiatives.

Remedial actions may be unavoidable.

Make no mistake: the current combination of elevated risk, deregulatory momentum, and limited international cooperation means timely preventive action is unlikely sufficient. Financial stresses related to NBFI will happen again. Authorities must therefore plan for crisis responses and remedial actions, 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 nonbank 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.

The global financial safety net must also adapt to a larger NBFI sector, including by maintaining and possibly expanding swap lines. There is a need to promote greater burden-sharing between the public and private sectors in recovery and resolution. More generally, central banks, fiscal authorities, and market regulators should incorporate financial stability more systematically into policy design and preserve sufficient operational capacity to respond to future episodes of stress.

None of this can happen without political will, ideally exercised cooperatively across the major jurisdictions. Building a more resilient NBFI framework will require sustained regulatory attention, strong institutional coordination, and credible contingency planning. Given the sector’s scale and vulnerabilities, these steps are no longer optional, but essential to limiting the frequency, severity, and public cost of future crises. 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 cleaning up after a next storm.

Notes

Stijn Claessens is an Executive Fellow at the Yale School of Management and was the Project Director of the G30 report, Nonbank Financial Intermediation and Financial Stability: A Perfect Storm in the Making?, co-chaired by Agustín Carstens, former governor of the Bank of Mexico (2010-2017) and former general manager of the Bank for International Settlements (2017-2025), and Klaas Knot, former president of the Dutch Central Bank (2011-2025) and former chairman of the Financial Stability Board (2021-2025) and currently a distinguished visiting fellow at the Peterson Institute for International Economics.

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