Perspective on Risk - July 8, 2025 (Blackrock, Blackstone & Jane Street)
A tale of systemic risk.
We should be careful that our regulatory framework doesn’t create incentives for core intermediation to migrate outside the banking system, where oversight is weaker and risks are harder to see.”
— Bowman, liberally paraphrased from remarks on supervisory recalibration, April 2025
Systemic risk arises through a set of well-understood channels; liquidity mismatches, leverage, margin spirals, network concentration. How these risks interact depends heavily on market structure, and that structure has evolved. As non-bank financial institutions (NBFIs) now intermediate credit and liquidity in ways that rival or replace banks, the boundaries of systemic oversight are blurred. With FSOC under attack, I thought I’d walk through a simplified scenario to illustrate how today’s financial architecture could turn localized stress into a full-blown systemic event.
How Systemic Financial Risk Arises
Credit Booms Gone Wrong
The long arc of financial history shows that crises are rarely random—they’re usually preceded by aggressive credit expansion. When households, corporations, or financial intermediaries borrow heavily during good times, the economy becomes more fragile to shocks. Schularick and Taylor’s work across 140 years and 14 countries showed that credit booms are among the strongest predictors of financial busts. When those booms are funded through loosely monitored channels—like shadow banks or private credit funds—the buildup can go unnoticed until it's too late.1
Pro-Cyclicality of Risk Management
Risk management systems, particularly those based on Value-at-Risk (VaR), often act in pro-cyclical ways. When markets are calm, measured volatility is low and firms are allowed to run large, leveraged positions. But when volatility spikes, the same models call for rapid deleveraging—forcing sales precisely when markets are under stress. This behavior, highlighted by Adrian and Shin, helps explain why markets tend to overshoot in both directions: institutions increase risk in booms and dump assets in busts, all guided by the same risk signals.2
Liquidity Mismatch and Run Dynamics
At the heart of many financial crises lies a simple mismatch: institutions promise investors easy access to their money while holding assets that can’t be sold quickly without a loss. This mismatch creates a fragile equilibrium—so long as investors believe they can redeem smoothly, all is well. But if expectations shift, redemptions surge, and managers are forced to sell illiquid assets into a falling market, triggering even more redemptions. This dynamic, described by Diamond and Dybvig in 1983, doesn’t just apply to banks—it now applies to mutual funds, ETFs, and even private real estate vehicles with quarterly redemption windows.3
Liquidity–Funding Spirals
When markets become volatile, financial institutions face higher margin requirements and tighter credit. As lenders pull back, market-makers and asset managers are forced to sell positions to meet funding needs, worsening liquidity in the very markets they’re trying to exit. The decline in market liquidity feeds back into tighter funding—Brunnermeier and Pedersen called this a “liquidity spiral.” The result is a self-reinforcing loop where both market and funding conditions deteriorate rapidly and simultaneously, often across asset classes.4
Fire-Sales and the Debt-Deflation Loop
When asset prices fall sharply, borrowers’ balance sheets weaken. Lenders mark down collateral values, tighten credit terms, and demand repayment—further depressing asset prices. This loop, first articulated by Irving Fisher in 1933, creates a deflationary spiral in which both the financial system and the real economy reinforce each other's stress. In today’s markets, where many institutions rely on mark-to-market financing and thin liquidity, the risk of fire-sales escalating into system-wide deleveraging remains ever-present.5
Network Contagion and Super-Spreader Nodes
Modern finance is deeply interconnected. A handful of large institutions sit at the center of webs of counterparties, funding relationships, and overlapping asset holdings. If one of these “super-spreader” nodes gets into trouble—say, a major dealer, asset manager, or market-maker—the shock quickly ripples through the system. As Haldane and May pointed out using tools from ecology, beyond a certain threshold of connectivity, more links can destabilize the system rather than strengthen it. What matters is not just size, but position in the network.6
The Players
These three firms, BlackRock, Blackstone, and Jane Street, aren’t banks, but they each occupy key structural nodes in the financial system.
BlackRock. BlackRock is the world’s largest asset manager, overseeing about $11.6 trillion in client assets, and is best known for its iShares ETF franchise and the Aladdin risk-management platform. It offers a broad range of index and active strategies plus technology services to institutional and retail investors on every continent.
Blackstone. Blackstone is the world’s largest alternative-asset manager, with more than $1.1 trillion in assets under management across private-equity, real-estate, credit, infrastructure and other specialty strategies. The firm pools long-term capital from institutions and high-net-worth investors and deploys it through leveraged buyouts, property portfolios, private-credit funds and other illiquid vehicles.
Jane Street. Jane Street is a privately held quantitative trading firm and market maker that generated roughly $20.5 billion in net revenue in 2024 while handling more than 10 % of U.S. equity trading volume and significant shares of ETF, options and fixed-income markets. It uses algorithmic strategies to provide continuous liquidity across thousands of instruments worldwide.
Market Structure & Interactions
Three very different players occupying what appear to be three very different spaces in the financial architecture. But there are intersections, or where one business is linked to the other two.
How Each Could Start A Systemic Event
Blackrock: The Run on Liquidity
Blackrock is perhaps the most traditional to evaluate. A sharp credit event (wave of Baa downgrades or default scare) triggers large redemptions from BlackRock’s investment-grade and high-yield bond ETFs. This leads to a firesale event where Blackrock instructs Jane Street to sell the most liquid position, triggering a classic Dimond-Dybvig style run.
Blackstone: A Collateral Shock
We’ve already witnessed what could have been the start of an event with Blackrock at the core. BREIT or BCRED hits its quarterly redemption cap amid rising investor concerns about valuations, prompting a wave of unsatisfied withdrawal requests and fear of NAV inflation. In response, Blackstone liquidates real-estate and private-credit positions into public markets (e.g., CMBS, REITs, syndicated loans), triggering sharp markdowns of comparable assets across the system.
Mark-to-market prices in public benchmarks fall, forcing insurers, banks and asset managers to take fair-value hits. This results in a repricing of collateral that further tightens credit across commercial real estate and middle-market loans; a Minsky–Fisher debt-deflation loop sets in.
Jane Street: From Liquidity Provider To Liquidity Hoarder
Jane Street has two channels that are different from the above. A macroeconomic or idiosyncratic event causes Jane Street to hit either VaR or funding capacity constraints. It widens quotes from markets just as investors are scrambling for liquidity. Other market makers follow, causing a liquidity–funding spiral across asset classes. The perception of continuous liquidity collapses, and core funds (especially bond ETFs) become untradeable—flipping from buffers to amplifiers of systemic stress.
The Story of a Systemic Crisis
I gave the above to Claude, and asked it to write me a story.
It starts on a Thursday morning with a seemingly routine data release: the latest economic surprise index collapses, signaling a sharper slowdown than anyone priced in. Within hours, high-yield bond spreads jump 150 basis points. Investors scramble to shed risk. BlackRock’s high-yield ETFs, once viewed as a stable income play, face a flood of redemptions—$15 billion a day. Jane Street, the largest authorized participant (AP), steps in to arbitrage the flows, taking delivery of bonds from BlackRock in exchange for ETF shares and trying to offload the inventory. But buyers are scarce.
Jane Street’s inventories balloon, and it turns to its repo desks at JPMorgan and Bank of America to finance the positions. Both banks are already watching volatility surge. Internal VaR metrics are rising across desks, and risk committees are holding emergency calls. Overnight, repo haircuts on corporate bonds rise. Initial margin at clearinghouses is bumped. Jane Street’s models flag a breach. Its algorithms start to widen spreads, then quietly pull quotes altogether. Market depth vanishes.
With ETF bid-ask spreads blowing out and NAV discounts hitting 4%, retail investors panic. BlackRock halts in-kind redemptions on a few of its more illiquid loan ETFs. The implicit promise of liquidity is broken. Advisors move client money into money-market funds en masse. Meanwhile, in BlackRock’s core bond funds, a new problem is emerging: regional-bank paper and BBB corporates are falling fast. No buyers. No bids. Yet more redemptions.
At the same time, Blackstone’s BREIT hits its redemption gate within a day. Requests flood in. To generate liquidity, Blackstone offers a large piece of its Sunbelt multifamily portfolio—staple properties with steady rent rolls. But bids come back 12% below appraised NAV. Blackstone takes the hit.
This sale triggers a collateral repricing. Public REITs gap lower. CMBS markets freeze. At Bank of America’s CRE lending desk, collateral coverage ratios are recalculated—margin calls go out to several warehouse and subscription-line borrowers, including smaller Blackstone vehicles. JPMorgan’s asset-backed finance desk tightens terms on NAV-based lending across multiple fund complexes.
The mark-to-market contagion spreads. Insurers holding similar multifamily debt start selling. Banks holding REIT bonds begin to hedge. The bid disappears for a swath of investment-grade and high-yield paper. Those bonds are in BlackRock’s passive ETFs, which now suffer a second redemption wave. ETF discounts grow. Retail flows spike again. Jane Street can no longer manage its positions—its funding is capped. JPMorgan and BofA repo desks say: no more.
Suddenly, market-making breaks. Treasury ETFs trade at 50–75 basis point discounts to NAV. TLT, HYG, LQD—names retail clients never worried about—become untradeable. Jane Street’s withdrawal creates a vacuum that few other dealers can fill. Spreads across ETFs, cash bonds, and derivatives gap simultaneously.
Now the shock turns institutional. JPMorgan and BofA are clearing agents, repo lenders, and risk model providers for all three firms. Their own balance sheets—though sound—are under pressure from VAR triggers and client demands. Other banks refuse to roll funding to hedge funds and asset managers. CCPs raise variation margin again. Clearing members—many of them regional banks exposed to CRE—start selling equities and bonds to meet calls. Fire-sales feed fire-sales.
On Monday of Week 5, the Fed steps in. It activates the Standing Repo Facility for non-bank dealers and announces it will temporarily accept high-quality corporate credit as repo collateral. Simultaneously, FDIC, OCC, and Fed supervisors coordinate to prevent forced resolutions at three regional banks on CRE watchlists. But the message is clear: this wasn't a bank-led crisis—yet it became a banking crisis because of how tightly banks were linked to BlackRock’s liquidity promise, Blackstone’s asset values, and Jane Street’s market presence.
Concluding Thoughts & Lessons
The stability literature teaches that liquidity promises, funding fragility, pro-cyclical risk limits, and network centrality—more than plain leverage—sink systems. Jane Street embodies all four.
Systemic risk doesn’t come from just one bad actor—it emerges when individually rational behaviors amplify each other through feedback loops. The most dangerous risks today are not always hidden leverage or fraud—they are the structural features of modern finance: liquidity mismatches, common risk models, fragile funding structures, and hyper-connected networks.
Banks weren’t the spark in this scenario, but they played a major role nonetheless. They funded the inventories, priced the collateral, and cleared the trades. And when they rationally pulled back the liquidity disappeared system-wide. In this new ecosystem, banks may no longer be at the center of the storm, but they remain its amplifiers.
At a time when much of the activity and risk has moved outside the already fragmented regulatory oversight regime, perhaps it is not the time to eliminate one of the better coordinating mechanisms we have: FSOC. As I’ve stated before, regulators with highly defined mandates can be the classic “drunk looking for his keys under the streetlight” - not because that’s where the keys are, but because that’s the only thing they can see.
Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008 (Schularick & Taylor)
Liquidity and Leverage. (Adrian & Shin)
Bank Runs, Deposit Insurance, and Liquidity. (Diamond, D. W., & Dybvig)
Market Liquidity and Funding Liquidity. (Brunnermeier & Pedersen)
The Debt-Deflation Theory of Great Depressions (Fisher)
Systemic Risk in Banking Ecosystems (Haldane & May)