IMF Warns of Growing Global Financial Stability Risks Amid Tightening Conditions and Uncertainty
The International Monetary Fund (IMF) has issued a warning about rising global financial stability risks, driven by tighter financial conditions, ongoing geopolitical tensions, and global trade uncertainties. In its latest Global Financial Stability Report, the IMF highlights vulnerabilities in capital markets, nonbank financial institutions (NBFIs), and sovereign debt markets, pointing out that the risk of financial instability has significantly increased in recent months. These risks are compounded by heightened trade tensions and geopolitical uncertainties that continue to put pressure on the global economy.
The IMF report notes that the concentration of global equity markets has increased, with the United States now representing nearly 55% of the global market, a sharp rise from 30% two decades ago. Despite recent market sell-offs, some asset valuations remain overextended, and the IMF warns that further price corrections could heighten market instability. Another key concern is the growing role of NBFIs, such as investment funds and pension funds, which have gained influence since the 2008 financial crisis. Their increasing interconnectedness with banks raises systemic risks, especially as nonbank borrowings now surpass banks’ core equity capital in some regions.
The IMF stresses that while nonbanks play an important role in the economy, their increasing leverage poses potential risks to financial stability. The interconnectedness between banks and NBFIs is particularly concerning, with the IMF urging for stronger policies to mitigate leverage and vulnerabilities. Banks remain central to global financial stability, and the IMF calls for rigorous implementation of international regulatory standards like Basel III to ensure they can withstand shocks from rising interconnections with nonbank entities.
Rising sovereign debt, particularly in emerging markets, also presents significant risks. High debt levels, coupled with insufficient improvements in market infrastructure, could increase volatility in government bond markets, making refinancing more challenging. The IMF recommends strengthening bond market resilience through reforms like central clearing of bonds and reducing counterparty risks. It also urges emerging economies to develop robust public financing frameworks and strategies to manage debt rollover risks and currency mismatches, emphasizing the importance of building resilient domestic markets to contain financing costs.
Source: Business day