FSB Chair warns of rising financial risks stemming from Middle East conflict

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• In his letter to the G20, FSB Chair Andrew Bailey highlights the significant challenges posed by the conflict in the Middle East and stresses the need for continued vigilance as financial conditions tighten.
• Andrew Bailey warns of an increased likelihood that multiple vulnerabilities could crystallise at the same time, amplifying the threat to financial stability and the provision of critical financial services.
• The letter flags upcoming work by the FSB on private credit markets and foreign exchange and derivatives markets.

The Financial Stability Board (FSB) today published a letter from its Chair, Andrew Bailey, to G20 Finance Ministers and Central Bank Governors ahead of their meeting on 16 April. The letter highlights the significant challenges posed by the ongoing conflict in the Middle East and its implications for global financial stability.

In the letter, Mr Bailey warns that vulnerabilities such as stretched asset valuations, concentrated leverage in the nonbank sector, and liquidity mismatches could interact with heightened financial market volatility and tightening financial market conditions, creating a potential "double or triple whammy" threat to financial stability.

While markets have so far absorbed the increased volatility, Mr Bailey stresses the need for constant vigilance to prevent systemic disruptions. He identifies three key areas that require heightened monitoring:

• Government bond markets: The use of high leverage by a limited number of funds pursuing similar strategies across jurisdictions has increased the risk of a disorderly unwinding of positions. This could lead to illiquidity in core government bond markets and cross-border spillovers.
• Global asset prices: Global asset prices remain elevated by historical standards. Certain sectors, such as those linked to artificial intelligence (AI), where valuations were already stretched before the conflict, are particularly vulnerable to sharp adjustments if economic conditions deteriorate.
• Private credit markets: Investor sentiment towards certain risky credit markets, notably private credit, had deteriorated before the conflict started. Mr Bailey notes that the conflict could increase debt-servicing pressures for leveraged borrowers and could reduce asset quality, thereby intensifying pressures on private credit funds. There is also a heightened risk that the opacity of these markets could trigger a broader loss of confidence even when the issues are limited to particular borrowers. The FSB will shortly publish a report looking at the vulnerabilities related to private credit in detail. The FSB will also collaborate with the International Association of Insurance Supervisors to address risks related to the growing interlinkages between private equity, private credit, and the life insurance sector.

Mr Bailey also emphasises the need for close monitoring of foreign exchange and derivatives markets, which, under heightened volatility, can amplify financial shocks. The FSB is advancing analytical work on foreign exchange derivatives and other amplification channels to better understand evolving risks. The FSB is also closely monitoring repo markets, which are critical for market liquidity.

The letter calls for enhanced international cooperation to address the challenges posed by an increasingly uncertain global environment and ensure the financial system continues to support sustainable economic growth.

Notes to editors

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Andrew Bailey, Governor of the Bank of England. The FSB Secretariat is located in Basel, Switzerland and hosted by the Bank for International Settlements.