Governor Tiff Macklem discusses how risks to financial stability are shifting as hedge funds and private credit play a growing role in global debt markets.
Increased risks related to new players
The rise of non-bank players, like hedge funds and private credit, in the global financial system has brought clear benefits by adding liquidity and flexibility to debt markets. But the shift away from the regulated banking sector has also increased risks to financial stability.
Most investment firms do a good job of managing their own risks, but they can’t see dangers building across markets and borders. The Financial Stability Board, a global body, helps connect the dots to identify systemic vulnerabilities through its Standing Committee on Assessment of Vulnerabilities (SCAV).
Today’s economic landscape has increased the urgency of this work:
- Geopolitical risks are high, with multiple conflicts playing out.
- Trade uncertainty remains high.
- Government spending and investment in artificial intelligence are supporting growth—but both could face limits.
- The outlook for global growth is more fragile than usual.
Non-bank players have taken on a bigger share of the credit market—and are not as closely monitored as traditional banks. Two areas deserve closer attention:
- leveraged trading by hedge funds in government bond markets
- the rapid expansion of private credit
Risks may be growing faster than our ability to understand and mitigate them. Economic uncertainty is already high—we cannot afford to add financial instability to the mix.”
Leverage in government bond markets
As governments issue more debt, hedge funds have become central players in sovereign bond markets. Hedge funds support liquidity, making it easier for debt to be bought and sold, and they help set prices. This improves market efficiency.
The concern is what occurs during periods of stress. In normal times, hedge funds typically borrow heavily to invest, often through repurchase agreements—repo markets—using very short-term loans with low safeguards. In times of stress, funding can dry up quickly, forcing hedge funds to sell the bonds under pressure. This can amplify price declines and strain liquidity.
To make these risks more visible to authorities and more manageable, we need better data, stronger market infrastructure and greater use of central clearing so repo markets can continue to function well under stress.
Here in Canada, the TMX is building a domestic tri-party repo platform, which the Bank of Canada plans to use for its domestic repo operations. Infrastructure improvements like these should strengthen confidence that core markets keep working—even in tough times.
Private credit
The global market for private credit—lending to companies by non-bank investors such as pension funds, insurers and investment funds—has grown quickly in recent years. Growth in private credit in Canada has been more modest, but Canadian institutions actively participate in this market.
Private credit fills important gaps. It provides financing to companies that may not be well served by traditional banks or public markets.
Again, the concern is how private credit behaves under stress and the difficulty in gauging the risks. Private credit is harder to assess in terms of loan quality, leverage and links to the rest of the financial system. If defaults rise, investors may try to exit quickly. Given limited liquidity, that stress could spill over to banks and public markets both domestically and across borders.
We are counting on the private sector as the first line of defence. But by working together to improve monitoring, share information and strengthen market infrastructure, we can make the system more robust.
Together, we can raise awareness and build resilience. When stress comes, we all need to be ready for it.”