MARKET NEWS

BY  Hope Moses-Ashike 

The International Monetary Fund (IMF) has warned that global financial stability risks have intensified, fuelled by tightening financial conditions, ongoing geopolitical tensions, and uncertainty in global trade.

The warning was issued in its latest ‘Global Financial Stability Report,’ which outlines mounting vulnerabilities across capital markets, nonbank financial institutions (NBFIs), and sovereign debt markets.

“We assess that global financial stability risks have grown significantly,” the IMF stated, “It is driven by tighter financial conditions and heightened trade and geopolitical uncertainty.”

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One of the key concerns highlighted is the growing concentration in global capital markets. According to the report, the United States now accounts for nearly 55 percent of the global equity market, up from just 30 percent two decades ago. The IMF noted that some asset valuations remain stretched despite recent sell-offs, and warned that “further asset price corrections suggest the need for close attention given the highly uncertain economic backdrop.”

Another area of concern is the growing influence of NBFIs, which include investment funds, insurance firms, and pension funds. Since the 2008 financial crisis, these institutions have played an increasingly large role in channeling savings into investments. However, their deepening interlinkages with banks raise fresh systemic risks.

“The nexus between banks and NBFIs has risen in recent years,” the IMF observed. “In the United States, NBFI borrowings have reached 120 percent of banks’ common equity tier 1 capital.”

The IMF cautioned that further sell-offs could put pressure on some institutions and spark a wave of deleveraging that would deepen market instability. While globally systemically important banks (G-SIBs) and clearinghouses use risk management tools such as collateral requirements to protect themselves, they cannot fully monitor or control clients’ leverage with other entities.

“Nonbanks boosting leverage doesn’t necessarily negate the benefits they provide to the economy,” the report said. “But it is crucial to strengthen policies that mitigate leverage and interconnectedness vulnerabilities.”

The report underscores the importance of enhanced reporting standards to help supervisors gain a comprehensive view of nonbank activities and to differentiate between institutions that contribute positively to the economy and those that pose excess risk or suffer from poor governance.

Banks, the IMF emphasised, remain at the heart of the global financial system and must be fortified to withstand shocks from their growing exposure to NBFIs. The Fund called for full, timely, and consistent implementation of Basel III and other internationally agreed regulatory standards to ensure global financial resilience.

“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.

Rising levels of sovereign debt also pose significant risks, particularly for emerging markets. Elevated debt has outpaced improvements in market infrastructure, potentially increasing volatility in government bond markets. For countries with high debt levels, refinancing could become more difficult, especially amid current market turmoil.

The IMF urged reforms to bolster bond market resilience, including promoting the central clearing of bonds and reducing counterparty risk. It also advised strengthening key market intermediaries to ensure they are operationally sound.

For emerging economies, the IMF recommended building credible frameworks for public financing and adopting strategies developed with the World Bank, such as the Medium-Term Debt Management Strategies, to manage rollover risks, currency mismatches, and borrowing costs.

“Increased demand for government bonds from long-term domestic investors has helped contain financing costs and cushion external pressures in recent years,” the IMF noted. “Developing domestic markets can further improve resilience.”

As financial conditions tighten and uncertainty persists, the IMF’s message is clear: policymakers must act decisively to reduce systemic vulnerabilities and reinforce the global financial system against future shocks.