Post-GFC rewiring of the global financial system
Keynote speech by Mr Hyun Song Shin, Economic Adviser and Head of the Monetary and Economic Department of the BIS, at the 15th Annual Julis Rabinowitz Public Policy and Finance (JRCPPF) Conference, Princeton, 20 February 2026.
The global stock of US dollar deposits has grown substantially since the Great Financial Crisis (GFC) to $26.1 trillion, with around 30% of the total in banks located outside the United States. The mechanics behind this growth are revealing. Central bank government bond purchases mechanically increase the deposits of the bond sellers, and the expansion of the Federal Reserve's balance sheet was indeed accompanied by a commensurate rise in dollar deposits. What is perhaps more noteworthy, however, is what has happened since: even as the Federal Reserve has allowed its balance sheet to shrink, the stock of dollar deposits has not followed suit. This ratchet effect – deposits rising with central bank purchases but not falling back when those purchases are unwound – invites closer scrutiny of who is absorbing the government bonds that the central bank is no longer buying.
One part of the answer appears to lie with non-bank financial institutions, and hedge funds in particular. Hedge fund exposures to sovereign debt have grown markedly in recent years, financed in large part through repo borrowing – often at very low or zero haircuts, which permits substantial leverage. The phenomenon is not confined to US markets; euro area repo activity and repo activity in several other jurisdictions are also sizeable.
Against this backdrop, the lecture steps back to examine the broader rewiring of the global financial system since the GFC. Two interrelated structural shifts have reshaped the landscape. The first is the growing prominence of government debt relative to private sector credit. Before the GFC, credit to the private non-financial sector grew faster than government debt; afterwards, the relationship reversed, with fiscal responses to the pandemic providing a further impetus. The second shift concerns the actors themselves. The GFC was fundamentally a banking crisis, with regulated banks at the centre. In its aftermath, the system has increasingly come to be shaped by portfolio managers. Portfolio flows – rather than cross-border bank lending – have moved to centre stage as a driver of financial conditions. Because sovereign bond markets are inherently global, currency choice is an integral part of the investment decision, and FX swaps – whose outstanding stock has reached $130 trillion – serve as the mechanism that makes money fungible across currencies. The banking sector continues to play a linchpin role in enabling these markets, even if accounting conventions may understate its involvement. Since banks also supply the bulk of the repo financing to hedge funds, these structural changes in the global financial system underline the importance of the banking sector as the cornerstone of the global financial system.
