World Economic Forum: Will Central Banks be able to 'coin' the right response in the next financial meltdown? Here's what experts say

There are doubts whether central banks across the globe would be able to effectively rescue the financial system whenever the next crisis as unprecedented geopolitical conflicts and government debt could complicate the responses, experts at the World Economic Forum.

A sharp surge in crypto assets and currencies could also be a point of challenge for the regulators as it would become difficult to take a call on as to how and who would handle the fallout of a crisis in their domain, they said.

``There are enough things to worry about, geoeconomic, geopolitical fragmentation in and of itself may have disruptive consequences on financial markets, may have some impact on our capacity to work together internationally if there is a problem popping up somewhere in the financial system,” said Klaas Knot, President, Central Bank of the Netherlands during a discussion on Can the Fianncial System Withstand the Next Crisis.


In the past three decades central banks across the world came to the rescue of the financial system when a few poorly managed companies threatened to collapse them. Whether it was the collapse of the hedge fund Long Term Capital Management, or the implosion of Lehman
Brothers, or Credit Suisse a few years ago.

A synchronised action from the Federal Reserve to the European Central Bank and Asian regulators helped soften the blow. But the geopolitical ruptures over Russia’s invasion of Ukraine and the return of Donald Trump have complicated matters. And the rise of cryptos
aren’t helping either.

``What about internationally? What about stable coins? Are they going to be in the system or out of the system? Who's going to support them,’’ asked Raghuram Rajan former Governor of the Reserve Bank of India. ``These are the kinds of things we need to examine going forward, because this is where the problems might arise.”

President Trump has promised to make the US crypto capital of the world and the most popular Bitcoin is trading past 1 lakh USD what some believe is a bubble territory.

Furthermore, since the rescue of the US financial system in the US in 2008, and the stimulus to economies have bloated the debt burden of governments across the world, reducing the leverage that they have in funding a private sector rescue. In fact, government debt itself
could trigger a crisis.

“If you look at the stack of outstanding debt, if there is a scenario in which inflation is not really coming under control and rates goes the other direction, the cost of that debt will become quite prohibitive and that may create a quite traditional crisis, a historical one,” said Sergio Ermotti, Griup CEO & President, UBS.