Macroscope | Why world must heed boy crying wolf over risk of financial crisis

The financial world appears to be basking in the idea that US President Donald Trump’s tariffs have fallen short of sparking a global trade war. Stock markets are riding high, bond markets are jittery but hardly panicking, inflation and interest rates are rising at a reasonable pace and – if there is anything to worry about – it is all geopolitical matters.

Why heed the cry of those who would have us believe that another global financial crisis is stealing upon the world, ready to savage sheeplike investors who take comfort in flocking together? The answer is that the proverbial wolf is in disguise now, shielded from attention behind a facade of benign and regulated respectability.

Few are worrying about the rich valuations of stocks, especially the “Magnificent Seven” tech firms whose market capitalisations now rival the gross domestic product of some nations. The banking system appears to be on solid ground.

In reality, global levels of lending and debt are real sources of concern. Myriad shadow banks and other nonbank financial institutions (NBFIs) have become wolf-like predators that have grown used to borrowing low-cost finance from big banks and lending it on at a useful margin to willing borrowers.

These levels of borrowing point to possible debt defaults as economies slow under the impact of tariffs and falling consumer demand. This is causing at least some financial regulators to lose sleep, and it hints at the risk of a systemic financial crisis given the highly interconnected nature of the global financial system.