Fractured markets: the big threats to the financial system | FT Film

About this video

• Video Title: Fractured markets: the big threats to the financial system | FT Film
• Channel: Financial Times
• Speakers: Not specified in the transcript.
• Duration: 25:53

Overview

This video explores the growing threats and fragilities within the global financial system, driven by the end of an era of low interest rates and the return of inflation. It examines how past policies have created vulnerabilities and discusses potential points of failure, using recent events in the UK as a case study. The film highlights concerns about market liquidity, leverage, and the ability of central banks to manage inflation while maintaining financial stability.

Key takeaways

• End of the Cheap Money Era: Decades of low interest rates have conditioned investors to expect easy money, but rising inflation has forced central banks to aggressively increase rates, leading to unforeseen market stresses.
• UK Pension Crisis as a Warning: The near-collapse of the UK gilt market due to pension fund LDI strategies demonstrated how rapidly markets can fracture when interest rates rise sharply, forcing rapid asset sales and collateral calls.
• US Treasuries Market Vulnerability: Despite being the world's most important bond market, the US Treasuries market is showing signs of stress, with declining liquidity and concerns about its ability to function smoothly. Dysfunction here could have catastrophic global consequences.
• Global Debt Distress: A significant portion of low-income countries are already near or at debt distress, exacerbated by rising global borrowing costs and a strong dollar, potentially leading to a wave of defaults.
• Shadow Banking Risks: With regulations tightening on traditional banks after 2008, much of the risk has shifted to the less-regulated "shadow banking" sector, making it harder for authorities to identify and manage systemic leverage.
• Central Bank Dilemma: Central banks face a difficult balancing act: fighting inflation by raising rates while simultaneously needing to maintain financial stability, a task made harder when these two objectives pull in opposite directions.
• Potential for Contagion: The interconnectedness of global markets means that a significant blow-up in one area, like the UK pension market, could spread to other markets, including the crucial US Treasuries and Japanese government bond markets.