Global financial markets have remained resilient, but financial stability risks remain elevated, according to a report that the International Monetary Fund (IMF) published on Tuesday.
The latest Global Financial Stability Report, an assessment of risks to the global financial system and markets, was released during the IMF–World Bank Group annual meetings in Bangkok, Thailand, which run through Oct. 18.
"Global financial markets have held up surprisingly well despite multiple shocks and very high uncertainty to a large extent because of upward growth surprises, strong corporate earnings, but also optimism on AI. But resilience is not safety. Financial stability risks remain elevated and there are key risks that could spark market stress," said Athanasios Vamvakidis, deputy division chief in the IMF's Monetary and Capital Markets Department.
Vamvakidis listed an AI-related market correction, the evolving risk of rising sovereign bond yields and cyber incidents as the three key risks that could trigger market turmoil and tighter financial conditions.
According to the IMF, banks held up under a harsh scenario involving shocks related to AI, bond markets and energy. However, vulnerabilities among weaker banks and non-bank financial institutions (NBFIs) could magnify stress in the future.
"Unresolved vulnerabilities could amplify shocks. The banking sector remains resilient under a severe stress test of shocks on AI, the bond market and energy. However, there is a tail of weak banks that in this scenario will be under-capitalized and this share has been increasing," said the IMF official.
"Several other vulnerabilities deserve close attention. Starting with NBFIs. First, insurance and pension funds hold more illiquid assets, raising risks in a downturn. Second, private credit faces higher borrower leverage and growing liquidity pressures, which could restrict lending. And third, hedge funds can support markets, but leverage and crowded trades could amplify stress. Moving to emerging markets, they've been resilient. However, there are concerns about weaker policy buffers in some cases, and less transparent alternative funding sources, in some frontier economies that could weigh on market access," added Vamvakidis.
With public debt high and policy space tighter than in the past, the IMF is calling for action before new shocks hit. Strengthening the resilience of the financial system should now be the main priority, according to the report.
"Strengthening resilience now, before shocks hit, should be the main focus. Public debt is high. Inflation remains above target in many economies and policy space is more limited than in the past. That makes it important to put debt on a sustainable path, preserve central bank independence, stick to the inflation mandates and communicate policy clearly and strengthen cyber resilience. Risks across banks and non-bank financial institutions also require close monitoring. The bottom line is simple. Now is the time to strengthen the financial system," explained Vamvakidis.
Global financial markets remain resilient despite elevated risks to financial stability: IMF report
