Global financial stability risks remain elevated despite broadly calm market conditions, the International Monetary Fund said in its Global Financial Stability Report released on October 14. The institution warns that high asset valuations, rising sovereign debt, and growing exposures between banks and nonbank financial institutions could increase the likelihood of a “disorderly correction” if investor sentiment changes.
The IMF’s analysis shows that while financial conditions have eased and markets remain resilient, several vulnerabilities are intensifying beneath the surface. “Beneath the calm surface, the ground is shifting in several parts of the financial system,” the report notes.
Tobias Adrian, Director of the IMF’s Monetary and Capital Markets Department, said that although financial conditions are currently easy, “macrofinancial risks remain somewhat elevated.”
The Fund cautioned that the growing concentration of equity market gains in a small number of companies could amplify volatility if expectations weaken.
The report also highlights the growing strain on sovereign bond markets caused by widening fiscal deficits and sustained government borrowing. While bond yields have been relatively stable, abrupt movements could pressure banks and open-ended investment funds with large sovereign holdings.
“Term premia in advanced economies have risen to levels not seen since before 2009,” Adrian said, noting that higher supply of government bonds may continue to drive yields upward.
The IMF called for “urgent fiscal adjustments” to strengthen debt sustainability and preserve confidence in sovereign markets.
The Fund’s analysis points to heightened interconnectedness between banks and the nonbank sector, which includes insurers, pension funds, hedge funds, and private credit providers. Nonbank institutions now hold roughly half of global financial assets, but many operate with lighter regulation and limited transparency.
According to the IMF, about 10% of US banks and nearly 30% of European banks would suffer significant capital losses if nonbanks simultaneously drew down credit lines. “Vulnerabilities in the nonbank sector are interconnected. They can quickly transmit to the core banking system, amplifying shocks and complicating crisis management,” the report said.
The Fund urged regulators to strengthen oversight and data collection in nonbank segments to prevent contagion risks.
The IMF also examined liquidity risks in the global foreign exchange market, which has reached a notional daily turnover of around USD 9.6 trillion. The report warns that episodes of market stress could be amplified by concentrated market-making activity and growing exposure to leveraged trading strategies.
The Fund recommends enhanced transparency, better stress testing, and improved settlement systems to limit potential spillovers across asset classes.
In its recommendations, the IMF called on policymakers to:
“While financial conditions remain favourable, the combination of high debt, stretched valuations, and rising interconnectedness underscores the need for vigilance,” the IMF said.
