Macklem is sounding the alarm in careful sentences on a Paris hotel podium. The financial system, he told the France-Canada Chamber of Commerce, has become “faster, more complex and less transparent” since the last crisis. Capital flows into the United States “could once again be misallocated” or “reverse suddenly.” A “painful correction” is possible. The question, he said, is “whether we adapt to a changing landscape—or wait for a crisis to force change upon us.”
The question is a good one. The central banking establishment has been asking it for fifteen years while declining to answer it.
The regulatory architecture is the documentary starting point. After 2008, the G20 committed to bringing shadow banking under oversight. The Financial Stability Board published its monitoring framework in 2011. Basel III raised capital requirements for banks. Dodd-Frank’s Title I gave the Financial Stability Oversight Council authority to designate nonbank financial companies as systemically important under §113—subjecting them to Federal Reserve supervision and enhanced prudential standards. The Office of Financial Research, under §153, was created specifically to monitor systemic risk in nonbank financial activity. The tools were built. The mandate was explicit.
What happened next is in the record. FSOC designated one nonbank entity—MetLife—under its §113 authority. The D.C. District Court vacated the designation in 2016. The subsequent administration settled with MetLife rather than pursuing the appeal. FSOC reformed its process to an activities-based approach that has produced no further designations. The Office of Financial Research saw its budget and research capacity cut through the mid-2010s. In the gaps the framework left open, private credit grew from hundreds of billions of dollars in assets under management before the crisis to an estimated $1.5 trillion to $2 trillion by 2024. Hedge fund leverage, pension fund allocation to illiquid alternatives, and insurance-company exposure to private credit expanded in parallel. The Financial Stability Board’s latest Global Monitoring Report on Non-Bank Financial Intermediation now places nonbank financial assets at 51 percent of global financial assets, exceeding the banking sector’s share. None of this was invisible. All of it happened in the space between what Dodd-Frank authorized and what FSOC chose to exercise.
The asset management industry—the Investment Company Institute, the Managed Funds Association, and firms including BlackRock, Blackstone, Apollo, and KKR—lobbied against extending bank-style prudential standards to nonbank entities. The structural argument was straightforward: nonbank lenders do not take deposits, have no discount-window access, and carry no implicit taxpayer backstop. The argument was correct on its own terms—and that is precisely why it worked. A technically sound argument, deployed by entities with no incentive to invite their own regulation, will always win a policy process that treats technical soundness as the end of the inquiry. The lobby won the policy argument. The gaps remained.
Macklem’s speech acknowledges the result without naming the process that produced it. The system is now faster, he says, but also more opaque. And that opacity is not passive information loss; it is active amplification. When asset managers and hedge funds deploy algorithmic risk models trained on overlapping market data, the supposed independence of their strategies collapses into a single correlated bet. In a stress event, the same model outputs trigger simultaneous sell orders across firms that believed they were diversifying—a cascade that moves faster than any human risk committee can convene. Private credit operates with disclosure standards that are a fraction of those applied to bank lending. Valuations are stale; leverage is layered; interconnection between nonbank entities is hidden from supervisors. S&P’s recent downgrade of the outlook on a Blackstone lending fund is a small, visible piece of a much larger opacity problem. When rating agencies begin marking down private credit vehicles, the question is how much has not yet been marked down, and by whom, and whether the supervisors would know before the reversal Macklem warns about.
The International Monetary Fund has warned that excessive current-account surpluses and deficits reflect increasingly unbalanced growth in China, the European Union, and the United States. Macklem frames this as a coordination problem: the world needs “more places for those savings to go.” The coordination framing converts specific domestic policy choices into a technocratic diagnosis awaiting a multilateral solution. The U.S. current-account deficit is the product of fiscal deficits driven by tax cuts that did not generate the revenue their authors projected, an overvalued dollar sustained by the capital inflows Macklem identifies as a risk, and a consumption-based growth model. China’s surplus is the product of a managed exchange rate, suppressed domestic consumption, and export-oriented industrial policy. Europe’s investment gap is the product of a fiscal framework that structurally suppresses public investment. These are not imbalances in the way the weather is imbalanced. They are policy choices, and calling them “imbalances” launders those choices into the neutral-sounding language of multilateral coordination.
Canada’s domestic situation underlines the gap between diagnosis and action. The Canadian economy contracted 0.1 percent in the first quarter, with the Carney government attributing the weakness to policy restructuring. Macklem is in Paris warning about global capital-flow misallocation while the economy the Bank of Canada is charged with stewarding is shrinking. The Bank of Canada’s financial stability mandate does not extend to the nonbank entities Macklem identifies as the growing risk. The surveillance gap he describes is not a gap the Bank of Canada lacks authority to address. It is a gap the central banking establishment—the Bank of Canada, the Federal Reserve, the European Central Bank, the Bank of England—chose to leave open.
The central-banker register is the mechanism of the reassurance. “History shows that the global economy and financial system eventually adapt and adjust.” Macklem uses the word “eventually” the way Volcker used to adjust his glasses: the word is a warning, not an observation. The claim is that adaptation comes through crisis—and the institutional machinery designed to prevent the last crisis was designed for regulated-bank balance sheets. The Financial Crisis Inquiry Commission documented, in its 2011 final report, the specific regulatory failures that permitted the shadow banking system to grow to systemic scale: the unregulated credit-default-swap market, the off-balance-sheet vehicles, the ratings-agency failures, the capital-requirement arbitrage that moved risk into entities no supervisor watched. Dodd-Frank and Basel III addressed every one of those failures—for banks. Not one fix extended, in any binding prudential sense, to the nonbank entities now intermediating a growing and systemically relevant share of global credit.
The tools to close this gap exist. FSOC’s §113 designation authority could be revived and applied. The SEC and CFTC could impose reporting requirements on private credit funds. The Basel Committee’s standards for bank exposures to nonbank entities could be tightened. The Fed could exercise supervisory authority over bank-affiliated nonbank lending subsidiaries more aggressively. Each of these instruments maps to a specific, documented failure that the Financial Crisis Inquiry Commission catalogued—and none has been exercised at the scale the current structure demands. What is absent is not technical capacity. It is political will.
Macklem is right that the system is faster, more complex, and less transparent. He is right that capital flows could be misallocated or reverse suddenly. He is right that the last time imbalances widened to comparable levels, the result was the worst financial crisis in eighty years. The central banking establishment adapted to that crisis by tightening bank regulation and leaving nonbank finance in the gaps. The nonbank lenders did not grow despite the framework. They grew because of it.
Macklem asked whether we adapt to a changing landscape or wait for a crisis to force change. The answer was given in 2016, when the D.C. District Court vacated the only nonbank systemic-risk designation FSOC ever issued, and the establishment chose to settle rather than appeal.