Experts are divided on what will cause the next financial crisis, with several prominent contenders emerging. Federal Reserve Chair Jerome Powell expressed concern over the soaring level of US government debt, which reached $39 trillion in March, representing 125% of GDP. He noted that while other advanced economies like Italy and Japan have higher debt-to-GDP ratios, the rapid and seemingly inexorable rise of US debt is unsustainable and could lead investors to question the safety of the dollar and Treasury bonds.
The private credit market, valued at $1.8 trillion, is another area of concern. Some large US funds have restricted investor withdrawals due to fears of rising losses on loans to heavily indebted companies. While Jamie Dimon, CEO of JPMorgan Chase, warned of higher-than-expected losses in leveraged lending, Powell downplayed the systemic risk, stating that regulators are not seeing connections to the banking system that would cause broader contagion. However, the European Systemic Risk Board noted "fragilities in the investment fund sector" that could amplify market stress.
New technologies, particularly the widespread use of AI in finance, are also considered a significant threat. Jón Danielsson, head of the LSE's Systemic Risk Centre, warned that AI could accelerate financial shocks, making it difficult for regulators to keep pace. He explained that banks are using AI for treasury and liquidity management, potentially leading to a much faster crisis response, while central banks and regulators might be slower to react.
Geopolitical events, such as the conflict in Iran, are consistently highlighted as a risk. The European Systemic Risk Board cautioned that a prolonged conflict could trigger "sharp and disorderly asset price corrections" and lead to tighter financing conditions. The Bank of England also warned that the Iran conflict could negatively impact global sovereign debt by weighing on growth, raising interest rates, and increasing spending pressures, thereby constraining governments' ability to respond to future shocks.
