The Financial Stability Board (FSB) has warned that global markets are headed for a chain reaction of tighter funding, war-induced volatility and deepening rifts in non-bank finance, in what its chair calls a “double-triple blow” to financial stability.
In a letter sent ahead of the G20 meeting on April 16, FSB Chairman Andrew Bailey laid out a scenario in which several weak parts of the financial system crack at the same time, rather than one at a time.
Bailey, who also serves as governor of the Bank of England, said the Middle East conflict had already pushed up energy prices and bond yields, and that these shocks could collide with soaring asset valuations, a concentration of leverage in the non-bank financial sector and growing uncertainty over the pricing of private credit.
He identified three areas in need of increased oversight: sovereign debt markets, asset valuation, and private credit.
Private trust collapses first
Much of the recent attention to financial vulnerabilities has focused on private credit.
Private credit is a large and rapidly growing sector of non-bank finance that lends money directly to businesses without going through traditional banking channels. The sector has grown to around $1.8 trillion, and the past few weeks have revealed how rapidly its confidence has deteriorated.
Blue Owl Capital has restricted withdrawals from two of its largest private credit funds after investors sought redemptions of about $5.4 billion in the first quarter. In the firm’s flagship $36 billion fund, redemptions reached 21.9% of outstanding shares, while in smaller, technology-focused funds, redemptions reached a staggering 40.7%.
Blue Owl, like most of its peers, caps redemptions at 5%. A fund managed by Barings took similar action the next day, restricting withdrawals after investors asked to withdraw 11.3% of their shares. Apollo, Ares, and BlackRock all imposed similar caps in the first quarter of this year.
These are not isolated events that happened by chance. These redemption caps are a true structural test of what happens when a fund promises investors regular access to cash while holding assets that will take weeks or months to sell at a fair price.
In calm markets, arrangements are smooth and few people have problems. But in times of crisis or heightened volatility, if too many investors head for the exits at once, the discrepancy between what the fund owns and what can be liquidated quickly becomes dangerous.
But Mr. Bailey’s letter made clear that private credit is just one of the vulnerabilities he is tracking.
The FSB is concerned that redemption pressures on private credit funds could reinforce tighter or overvalued funding conditions in other regions, creating a chain reaction in which each problem worsens the next.
Dangers looming outside traditional banks
Traditional banks are highly regulated and hold capital buffers under frameworks such as Basel III, created to strengthen resilience after the 2007-09 financial crisis. Mr Bailey said this would allow banks to remain resilient to this shock.
The bigger concern now lies outside the bank boundary, in what regulators call non-bank financial intermediaries (NBFIs). This broad ecosystem includes hedge funds, insurance companies, pension funds, and private lending vehicles, into which a significant portion of credit creation and risk-taking has shifted since 2008. Rules are different, leverage can be high, and transparency is often limited.
The main accelerator here is leverage. As positions grow with borrowed funds and prices soar, leveraged investors are simultaneously forced to sell, causing prices to fall further and radiating stress to adjacent markets.
In the government bond market, the FSB warned that a limited number of funds pursuing similar high-leverage strategies was increasing the risk of disorderly unwinding, which could drain liquidity from the core government bond market and cause cross-border spillovers.
The link between banks and non-bank financial institutions makes this more difficult to contain than it seems.
U.S. bank lending to non-depository financial institutions has nearly quadrupled over the past decade, surging to about $1.4 trillion at the end of 2025, according to Moody’s Ratings. These loans now account for about 11% of total bank lending, making them the fastest-growing part of banks’ balance sheets.
The Fed is now asking major U.S. banks to detail their private credit exposures as redemptions soar and bad loans rise. The Treasury Department plans to hold separate discussions with state insurance regulators regarding exposures in the same area.
How epidemics spread and what it means for cryptocurrencies
The chain involving the FSB follows a well-known path.
Geopolitical or macroeconomic shocks increase uncertainty, causing oil and bond yields to soar and funding costs to rise. Investors then begin to question whether asset prices still reflect reality, leading to increased redemption claims, typically from initially illiquid private credit funds.
These funds then raise cash by gating withdrawals or selling assets in weak markets. Banks and insurance companies will reassess their exposures, credit will become harder to obtain for businesses and borrowers, and risky assets will be aggressively repriced.
In particular, Mr. Bailey warned of a scenario in which markets begin to price in a bigger hit to global economic growth, triggering a sudden revaluation of stock prices at the same time as increased scrutiny of private asset valuations. He noted that global asset prices remain significantly elevated compared to historical norms, and sectors with high valuations even before the conflict will be particularly vulnerable if economic conditions deteriorate.
Its influence extends far beyond Wall Street.
Businesses face more expensive refinancing and more selective private credit lenders, weaker companies struggle to roll over loans, and hiring and expansion plans may stall. Retirement portfolios can be hurt by indirect exposure to non-bank assets even if no single bank fails.
In the case of cryptocurrencies, this type of widespread financial stress tends to weigh heavily on liquidity-sensitive assets in the short term. This is especially important for Bitcoin. Bitcoin and Ethereum have historically sold off along with equities when markets move into risk-off mode, and tighter funding conditions make leverage riskier and more expensive in all markets.
Demand for stablecoins may rise as a defensive measure, but speculative appetite is usually the first to disappear.
The timing of Bailey’s letter is also significant in its own right.
The warning comes just days before G20 finance ministers and central bank governors meet in Washington on the sidelines of the IMF Spring Meetings. The FSB has announced that it will publish a dedicated report on private credit vulnerabilities in the near future. We are also working with the International Association of Insurance Supervisors to address the risks posed by the increasing interconnections between the private equity, private credit and life insurance sectors.
Earlier this year, the FSB separately warned of vulnerabilities in the government bond-backed repo market, a further signal that the connective tissue between financial institutions can become vulnerable under stress.
The central contradiction in Mr. Bailey’s warning is difficult to ignore. Banks may be stronger than they were before 2008, but the financial system may still be vulnerable. Because risks are moving into places that are less visible, harder to regulate, and almost impossible to contain once they start moving.
