The risk of a financial crisis and a new recession

Deregulation

Financial markets are experiencing a renewed wave of deregulation in 2025-2026, particularly in the US and EU, aiming to boost competitiveness and corporate growth. Critics argue this loosening threatens financial stability, weakens oversight, and poses risks similar to pre-2008 levels. Key areas include easing leverage rules, reducing capital requirements for banks, and relaxing oversight on non-bank financial institutions.

Current Deregulatory Trends: 

• US Banking Easing: FDIC and federal regulators have eased key leverage rules for banks, allowing reduced capital requirements.
• EU Competitiveness Focus: The European Commission launched "simplification omnibus packages" in 2025 to reduce reporting burdens on banks, driven by calls for enhanced competitiveness.
• Private Credit Growth: Alternative lenders and private credit markets are operating with reduced oversight, growing rapidly

Concerns About Current Policies:

·         Stability Risks: Reduced capital requirements may limit the ability of banks to withstand crises.

·         Return of Risks: The resurgence of deregulatory agendas is often viewed as a trade-off, where near-term profitability for banks comes at the cost of future financial instability.

·         Weakened Oversight: Critics argue that the dismantling of protections established after the 2008 financial crisis (like Dodd-Frank) could lead to increased fraud and reduced market integrity.

https://www.ecb.europa.eu/press/key/date/2025/html/ecb.sp251003_1~edb1443d00.en.html

https://www.columbiathreadneedle.com/fr/fr/institutional/insights/the-resurgence-of-financial-deregulation-implications-for-markets-and-investors/#:~:text=The%20resurgence%20of%20financial%20deregulation%20is%20reshaping%20the%20competitive%20landscape,vigilance%20and%20adaptability%20remain%20essential.

https://blog.siebert.com/banks-are-back-and-that-should-worry-you#:~:text=It%20is%20clear%20that%20traditional,twirling%20mustaches%20in%20corner%20offices. 

The Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) is a sweeping U.S. federal law enacted in response to the 2008 financial crisis to decrease risk in the financial system. It established stricter regulations on banks, non-bank financial institutions, and derivatives markets, while creating the Consumer Financial Protection Bureau (CFPB) to prevent predatory lending.

Key Components and Impact:

• Consumer Financial Protection Bureau (CFPB): Created an independent agency to protect consumers in the financial marketplace, overseeing mortgages, credit cards, and loans.
• Volcker Rule: Limits the ability of U.S. banks to make certain kinds of speculative investments that do not benefit their customers, effectively restricting proprietary trading.
• "Too Big to Fail" Mitigation: Aims to mitigate risks from large financial institutions whose failure could trigger a systemic crisis, establishing mechanisms for their orderly liquidation.
• Financial Stability Oversight Council (FSOC): Established to monitor risks to the entire U.S. financial system.
• Derivatives Regulation: Increased transparency and oversight in the swaps market, regulating swap dealers and requiring margin requirements.
• Whistleblower Program: Enhanced the SEC’s authority to reward whistleblowers who provide information leading to successful enforcement actions. 

• Origin: Signed into law by President Barack Obama in July 2010 following the "Great Recession".
• Criticisms & Changes: Critics, including financial institutions, often argue the law imposes excessive compliance costs, particularly on smaller banks. In 2018, Congress passed legislation that rolled back parts of the act, easing regulations on many small-to-medium-sized banks. 

The Dodd-Frank Act represents the most significant overhaul of financial regulation in the U.S. since the Great Depression.

The Growing Shadow Banking Problem

Financial markets are facing renewed concerns regarding excessive deregulation, with shadow banking (also known as non-bank financial intermediation, or NBFI) acting as a primary source of systemic risk, according to reports from late 2025 and early 2026. While traditional banks have become more regulated since the 2008 financial crisis, risk has shifted to less regulated non-bank entities—such as hedge funds, private credit providers, and investment funds—which now account for approximately 51% of global financial assets, or roughly $256.8 trillion.

• Rapid Expansion: Shadow banking (non-bank financial intermediation) is growing at nearly double the rate of traditional lenders.
• Systemic Risk: The sector is characterized by high leverage, maturity mismatches, and opacity, which can create systemic risks to the broader financial system.
• Data Gaps: Global regulators, including the Financial Stability Board (FSB), have warned they are "blind" to many dangers in this sector due to severe data limitations, particularly regarding private credit.
• Failed Oversight: Despite the 2008 crisis being triggered by shadow banking, reforms like Dodd-Frank primarily targeted traditional banks, leaving the "shadow" sector largely intact.

While the global financial system is generally considered better capitalized than in 2008, analysts argue that a new "casino" of unregulated credit has emerged. The resurgence of financial deregulation, often aimed at promoting growth, has "sown the seeds of future instability," as some analysts fear another crisis could stem from the opaque shadow banking sector.

Key Public Debt & Risk Factors for 2026

Entering 2026, the global financial market is characterized by a "resilient but risky" environment, where high public debt levels (exceeding 235% of world GDP) are putting pressure on sovereign issuers amid high, albeit potentially peaking, interest rates. While a widespread sovereign default crisis is not the base case, the risk of "bond vigilantes" driving up yields is increasing, particularly for countries with high deficits.

• US Debt Ceiling and Deficits: The US faces renewed risks around its debt ceiling, with potential for instability in November 2026. The US federal deficit is projected to reach $1.9 trillion in FY 2026, with debt held by the public expected to reach 101% of GDP, rising toward 120% by 2036.
• European Sovereign Pressure: Europe is experiencing structural headwinds, with France facing high debt and a "relentlessly up" probability of default for its corporates, alongside high 10-year real yields. Italy is also seen as having volatile debt, with persistent risks from stagnant GDP growth.
• Market Vulnerability: Potential for turmoil in government debt markets is considered the biggest risk, with the capacity to trigger sharp increases in interest rates and market volatility.

https://www.oecd.org/en/about/news/press-releases/2026/03/with-pressures-rising-in-global-debt-markets-maintaining-resilience-will-require-sound-public-finances-strong-institutions-and-policies-that-support-growth-and-innovation.html#:~:text=The%20OECD%20Global%20Debt%20Report,medium%2Dterm%20growth%20prospects.%E2%80%9D

https://realeconomy.rsmus.com/the-growth-of-government-debt-and-its-consequences-for-financial-markets/#:~:text=After%20that%2C%20the%20primary%20deficit,deterrent%20to%20investment%20and%20growth.

Italy

As of early 2026, Italy's public debt remains a significant area of focus for financial markets, characterized by high debt-to-GDP levels, but with a generally stable outlook from rating agencies. While the risk of default is deemed low in the short term, the sustainability of the debt depends on future economic growth, deficit reduction, and ECB interest rate policies

·         Default Risk: Fitch Ratings affirmed Italy’s Long-Term Foreign-Currency Issuer Default Rating at 'BBB+' with a Stable Outlook in March 2026, citing a large, diversified economy and benefits of eurozone membership.

·         Debt Trajectory: Public debt is expected to continue increasing until 2027, with predictions of it reaching 137.9% of GDP in early 2026 before potentially starting to decline in 2027-2028.

·         Deficit Targets: S&P projects the budget deficit to marginally decline to around 2.9% of GDP in 2026, dipping below the 3% threshold, aided by measures such as taxes on banks and insurance companies.

·         Financing Needs: In 2026, Italy faces around EUR 256 billion in maturing securities (net of BOTs)

https://www.eunews.it/en/2026/01/29/low-growth-new-debt-interest-rates-in-italy-ingredients-for-budgetary-unsustainability/#:~:text=Brussels%20%E2%80%93%20Italy%20has%20everything%20it,to%20the%20European%20Commission's%20estimates.

The Great Depression

As regards tariffs, don’t forget:

• The Smoot-Hawley Tariff Act of 1930 (or Hawley-Smoot Act): was a U.S. law signed by President Herbert Hoover on June 17, 1930, that raised import duties on over 20,000 goods by roughly 20% to 60%, aiming to protect American farmers and businesses during the Great Depression. It was sponsored by Senator Reed Smoot of Utah and Representative Willis C. Hawley of Oregon. Over 1,000 economists warned President Hoover to veto the legislation, warning of increased consumer prices and international retaliation.
• Aftermath: It is largely considered to have failed, causing a global trade war, a 66% decline in international trade from 1929–1934, and worsened economic conditions, contributing to the severity of the Great Depression. In 1934 under FDR, the legislation was largely rolled back by the Reciprocal Trade Agreements Act.