The International Monetary Fund (IMF) has warned in its latest Global Financial Stability Report that global financial risks are escalating as tighter monetary conditions, geopolitical tensions, and trade uncertainties compound existing vulnerabilities.
The IMF’s assessment paints a cautionary picture of the world economy, citing growing fragility in capital markets, sovereign debt, and the expanding influence of nonbank financial institutions (NBFIs).
“We assess that global financial stability risks have grown significantly; this is driven by tighter financial conditions and heightened trade and geopolitical uncertainty.” The report states.
One key red flag is the rising concentration in global capital markets. The report reveals that the United States now represents nearly 55% of the global equity market—up from 30% two decades ago. While some recent sell-offs have helped deflate excessive valuations, the IMF cautions that asset prices remain stretched in several sectors.
“Further asset price corrections suggest the need for close attention given the highly uncertain economic backdrop,” the Fund noted.
The IMF also raised concerns over the growing prominence of NBFIs—including pension funds, insurers, and investment firms—whose increasing leverage and ties with banks could amplify systemic shocks.
In the U.S. alone, NBFI borrowings have surged to 120% of banks’ core capital. Though these institutions play a vital role in channelling capital, their complex interconnections with the banking sector heighten contagion risks.
“Nonbanks boosting leverage doesn’t necessarily negate the benefits they provide to the economy, but it is crucial to strengthen policies that mitigate leverage and interconnectedness vulnerabilities.” IMF said. “
The Fund recommended enhancing disclosure requirements and supervisory oversight to better understand and manage these risks.
Rising sovereign debt, particularly in emerging markets, is another mounting concern. The IMF warned that debt accumulation has outpaced improvements in market infrastructure, potentially increasing volatility in bond markets.
For countries facing high refinancing needs, the cost of borrowing could become increasingly burdensome amid current market instability.
To address these vulnerabilities, the IMF advised: Promoting central clearing in bond markets, reducing counterparty risks, Strengthening the operational capacity of market intermediaries, building credible public financing frameworks in partnership with institutions like the World Bank.
“Developing domestic markets can further improve resilience. Increased demand for government bonds from long-term domestic investors has helped cushion external pressures.”
The IMF concluded by urging global policymakers to act swiftly and decisively to reinforce financial stability. This includes implementing Basel III standards fully and uniformly to safeguard against future shocks.
“Banks, as the foundation of the system, must be resilient to adverse shocks, including those stemming from their increasing interconnections with nonbanks,” the report stressed.
