The head of the Financial Stability Board has issued a stark warning to the world’s leading economies that the global financial system faces the risk of simultaneous, compounding shocks as the Iran war drives up funding costs and exposes deep-seated vulnerabilities across markets. The global financial system has so far absorbed the economic shock caused by the Iran war, partly thanks to post-2008 crisis reforms, but rising funding costs may exacerbate growing stress in other parts of the system, the FSB chair warned the G20.

According to a press release from FSB, Andrew Bailey, the governor of the Bank of England and chair of the FSB, warned of a potential “double or triple whammy” if tighter funding conditions cause multiple vulnerabilities to crystallize at the same time,  including stretched asset valuations, non-bank leverage, and private credit stress. Bailey was writing to G20 Finance Ministers and Central Bank Governors ahead of the IMF meeting of global policy leaders in Washington.

The FSB chair identified three key areas requiring heightened monitoring: government bond markets, where high leverage among a limited number of funds pursuing similar strategies has raised the risk of a disorderly unwinding of positions; global asset prices, which remain elevated by historical standards; and private credit markets, where investor sentiment had already deteriorated before the conflict began. Bailey noted the conflict could increase debt-servicing pressures for leveraged borrowers and reduce asset quality, intensifying stress on private credit funds. He also warned that the opacity of private credit markets could trigger a broader loss of confidence even when problems are confined to particular borrowers.

Bailey cautioned that when heightened market volatility and tightening financial conditions are combined with existing vulnerabilities – including concentrated leverage in the non-bank financial sector, liquidity mismatches and increasing market complexity-  these factors could lead to multiple shocks materializing simultaneously. The impact on financial stability will ultimately depend on the duration, scale, and consequences of the conflict.

Despite the turbulence, banks have remained resilient, reflecting the strength of post-global financial crisis reforms and underscoring the importance of implementing Basel III capital rules. The FSB said it would shortly publish a dedicated report on vulnerabilities arising from private credit markets.

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Source: https://www.fsb.org/2026/04/fsb-chair-warns-of-rising-financial-risks-stemming-from-middle-east-conflict/