The next emerging market crisis may not begin with a failing bank. Instead, it may begin with a margin call, a change in collateral haircuts, a wave of redemptions from an open-ended fund or a global portfolio manager forced to cut exposure after a rise in dollar funding costs. By the time the pressure appears on a bank balance sheet, the decisive transmission may already have occurred. This is one of the central lessons of the post-crisis financial system.
Banks are better capitalised than they were before the 2008 financial crisis. Liquidity rules are more demanding, stress tests more sophisticated and resolution regimes more credible. While this progress matters, it has also encouraged the misconception that stronger banks, by themselves, amount to a safer financial system.
Fragility now increasingly sits within the market-based channels connecting banks, asset managers, hedge funds, pension funds, broker-dealers, clearing houses and global portfolios. These channels are not marginal to financial stability; they are the operating system of modern finance.
The Financial Stability Board’s latest monitoring work makes the scale of this shift clear. Non-bank financial intermediation reached $256.8tn in 2024 and grew at twice the pace of the banking sector – rendering this segment of finance one of the main arenas in which liquidity, leverage and risk-taking are formed.
The modern resilience paradox
A traditional bank run is visible. Depositors leave and liquidity vanishes. A market-based run is harder to see in real time. It occurs when secured funding is not rolled over, when haircuts rise, when margin calls force investors to raise cash or when funds sell assets to meet redemptions. The mechanics are different, but the outcome can be similar: forced deleveraging, falling prices, weaker liquidity and a rapid tightening of financial conditions.
This distinction matters, especially for emerging markets. A country may have credible monetary policy, yet still suffer severe market stress when global investors reduce risk. Emerging market assets are often sold because local fundamentals have suddenly deteriorated and because they are liquid enough to sell, risky enough to cut and exposed enough to global portfolio rules.
That is the modern resilience paradox. Many emerging economies have strengthened their financial architecture, but remain vulnerable to shocks transmitted through segments of the global system they do not fully control and cannot always observe.
My doctoral work on emerging market vulnerability reached a complementary conclusion. In large emerging economies, one empirical layer shows how global energy price movements can precede equity market movements. Another shows that deeper integration can strengthen trade and financial links, but does not remove exposure to global disturbances. The broader conclusion is straightforward: integration changes the channels of vulnerability; it does not abolish them.
Now, the relevant question is no longer only whether banks are individually safe, but it is whether authorities can see how stress travels between banks and markets before it becomes systemic.
Implementing market plumbing
The blind spot is market plumbing: collateral practices, margining rules, repurchase agreement markets, securities financing, dealer balance sheets, clearing arrangements and liquidity in local bond and foreign exchange markets. Altogether, these details determine whether a shock is absorbed gradually or amplified suddenly.
The March 2020 dash for cash showed why this matters. The FSB’s review concluded that the turmoil highlighted the need to address vulnerabilities associated with non-bank financial intermediation. It also showed that market liquidity had become central to financial resilience.
When volatility rises, margins increase. When margins increase, investors need cash. When cash is scarce, assets are sold. When many investors sell at the same time, prices fall and liquidity thins. Falling prices then trigger more collateral pressure and more selling, turning ordinary repricing into systemic stress.
Banks remain bound to this loop even when they are not the original source of risk. They provide clearing, custody, derivatives intermediation, credit lines, repo financing, market-making and prime brokerage. They are the bridge between regulated banking and non-bank finance. A framework that supervises banks without mapping their links to market-based finance will miss the channels through which stress can return to the banking system.
The next generation of macroprudential surveillance should therefore include a market-plumbing dashboard. This agenda is already moving into the official policy debate. The FSB has issued recommendations to improve the liquidity preparedness of non-bank market participants for margin and collateral calls in centrally and non-centrally cleared derivatives and securities markets, including securities financing such as repo.
Avoiding the next emerging market crisis
Emerging markets must adapt the logic of macroprudential surveillance to the way shocks actually arrive. They arrive through the dollar, commodities, global risk appetite, collateral values, fund flows and funding liquidity. Domestic banking data alone will not be enough.
This is not an argument for treating every fund like a bank. Banks are special because of deposits, payments, credit creation and monetary transmission. But similar risk-creating activities should be visible to supervisors wherever they occur. Leverage, liquidity mismatch and procyclical collateral dynamics matter for various reasons. Respectively, because they amplify losses, force selling and transmit stress across institutions and borders. Their systemic relevance does not depend on the legal label of the institution carrying them.
Central banks are well placed to close this gap, but they cannot do it alone. The relevant information is usually dispersed across banking supervisors, securities regulators, clearing houses, exchanges, finance ministries and foreign authorities. In emerging markets, this fragmentation is particularly costly. External shocks arrive quickly, domestic market liquidity can be shallow and policy space is often narrower than in advanced economies.
The agenda should begin with better data and better co-ordination. Authorities need more timely information on securities financing, derivatives, margin liquidity, fund flows and bank exposures to non-bank intermediaries. Liquidity stress tests should include not only banks, but also the market channels through which banks finance and intermediate non-bank risk. Crisis protocols should allow central banks, market regulators and fiscal authorities to share information before liquidity stress becomes disorderly. The purpose is not to prevent every fall in asset prices; it is to prevent ordinary repricing from becoming forced selling, funding stress and macrofinancial instability.
In the last regulatory era, the central task was to make banks safer. In the next one, the task will be to understand how risk travels through the space between banks and markets. For emerging economies, that distinction may be decisive.
Gustavo Pessoa is Professor of Economics at Fundação Getulio Vargas.
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