Bank of Canada chief flags private credit and non‑banks as rising systemic threats for investors
Hedge funds that buy almost half of Canadian government bonds could turn the next market shock into a systemic event if they are forced to unwind leveraged positions in a hurry, Bank of Canada governor Tiff Macklem warned in a recent speech.
According to Reuters, Macklem told the Global Risk Institute in Toronto that “economic uncertainty is already high — we cannot afford to add financial instability to the mix,” and said risks to growth are greater than normal and “tilted to the downside.”
He linked that to US and Israeli strikes on Iran, which he said have increased volatility in energy and financial markets and created “considerable uncertainty about the duration and fallout of this conflict.”
According to the Financial Post, non‑bank financial players have become central to how sovereign debt markets function “both globally and here at home.”
The paper said non‑bank investors can take up to 50 percent of Canadian government bond sales and hold a large share of secondary‑market activity.
Macklem said hedge funds tend to have high leverage and are more sensitive to disruption, according to Reuters.
“One scenario we worry about is a shock to markets that leads to a spike in interest rate volatility,” Macklem said.
As reported by the Financial Post, he cautioned that “higher funding costs or reduced access can force the positions to be unwound.
Leverage can build quietly and then unwind very quickly when conditions change,” and warned that “the scale of these trades and speed at which they can unwind pose a systemic risk.”
The Financial Post reported that Macklem sees similar vulnerabilities in the now trillion‑dollar private credit market, which he said is “filling gaps in the system.”
“The issue is not private credit itself. It’s how private credit will behave under stress,” he said, warning that “the opacity of private credit means investors may not have enough information about the quality of loans held in their funds.”
He warned that “a spike in defaults could prompt them to try to exit their positions quickly,” creating strains that could spill over into public credit markets.
The Financial Post also noted that banks and insurers are “linked to private credit through lending, sponsorship, warehousing and risk transfer,” and that Canadian pension funds and insurers are active players in private credit internationally, even though the market has not grown as quickly in Canada.
Macklem said “systemic risks didn’t disappear after the global financial crisis in 2008, they just migrated,” because global surveillance and regulatory frameworks have not kept up.
“Our oversight was built for banking,” he said, pointing out that non‑bank players generally do not have the same reporting requirements or level of monitoring.
After his speech, Macklem said “the basics of risk such as liquidity and leverage haven’t changed, but new players are making the system more complicated,” the Financial Post reported.
He said those new interconnections add complexity and make it easier to hide leverage.
