Global Financial Stability Risks Increase

By Pete Schroeder

Washington (Reuters) – Global financial stability risks have increased significantly since the fall, driven largely by heightened economic uncertainty around trade policy and other geopolitical factors, the International Monetary Fund (IMF) cautioned Tuesday.

In its semiannual Global Financial Stability Report, the IMF noted that tightening financial conditions, coupled with heightened uncertainty, are driving up financial risks worldwide.

> “The overall level of policy uncertainty has increased…the forecast of economic activity going forward is slightly lower,” said Tobias Adrian, director of the IMF’s monetary and capital markets department.

The warning of higher financial risks comes as the IMF cut growth forecasts for most countries, citing the impact of U.S. tariffs.

Vulnerabilities Highlighted

Specifically, the IMF flagged three vulnerabilities that could weigh on financial stability going forward:
1. Valuations remain high in some equity and corporate debt markets despite recent selloffs, leaving room for further declines.
2. Highly leveraged financial institutions, such as hedge funds, could come under strain in volatile markets, exacerbating selloffs.
3. More turmoil could weigh on sovereign debt markets, particularly for countries with high debt levels.

The IMF’s update to its gauge of financial risks follows the election of President Donald Trump and his efforts to impose sweeping tariffs globally. The report coincides with the semiannual meetings of the IMF and World Bank in Washington.

Tariff Turmoil Impact

The IMF warned that tariff turmoil could heavily impact banks, as a trade shock might force banks to reserve more funds against potential losses, reduce noninterest income during capital market slowdowns, or disrupt trade finance, which accounts for $18 billion in bank revenue worldwide.

> “Trade finance depends on stable cash flows, supply chains, and regulatory frameworks, all of which might be disrupted by abrupt tariff changes,” the report stated.

Recommendations

In response to these risks, the IMF reiterated its call for global regulators to ensure banks maintain sufficient capital and liquidity, including the implementation of the global Basel III accord on higher capital standards.

The IMF urged for “full, timely and consistent implementation” of those new standards, as U.S. regulators are likely to abandon prior attempts in favor of crafting new rules with minimal capital burden on banks.

Additionally, the IMF called for “independent and intensive” supervision of banks, emphasizing the interactions between banks and nonbanks, which face less scrutiny.

> “The growing interconnectedness across jurisdictions means that stress from specific jurisdictions can have a global impact, necessitating preparedness from other regions,” the IMF concluded.

The report also warned that internationally active non-U.S. banks could face U.S. dollar funding pressures due to heightened volatility and geopolitical events. Reuters previously reported concerns from some European central banking and supervisory officials regarding reliance on the U.S. Federal Reserve for dollar funding during market stress.