Interest rate hikes from central banks across the globe could trigger a chain of bankruptcies in the global “shadow banking” industry, the Bank for International Settlements (BIS) has warned.
In an interview with The Times, Claudio Borio, head of the BIS’ monetary and economic department, said “shadow banks” – including hedge funds, pension funds, and private equity firms – are facing an ongoing liquidity crunch that first started in March 2020.
“There is a hidden liquidity mismatch which erupted in March 2020 and we cannot rule out further possibilities of strain in the shadow banking sector,” Borio said.
The world’s largely unregulated shadow banking sector has doubled in size over the past decade and now manages more than $60trn in assets.
The warnings follow the collapse of Archegos Capital Management – a multi-billion-dollar family office set up to manage funds owned by American billionaire Bill Hwang.
The billionaire’s private hedge fund imposed major losses on several investment banks, including Goldman Sachs, Morgan Stanley and Credit Suisse, after it lost billions in a matter of days. Archegos’ collapse later resulted in Hwang being arrested.
“Not only was the capital of Archegos largely wiped out but several banks that provided it with prime brokerage services also took significant hits to their own capital buffers,” the BIS said.
Higher global interest rates could also increase pressure on highly indebted countries, who are now set to face significantly higher debt servicing bills.