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IMF warns of growing fragility beyond banks

The IMF’s new financial stability assessment highlights rising exposure to illiquid assets among insurers and pension funds, leverage in private credit and crowded hedge-fund trades. Banks remain broadly resilient in a severe stress test, although weaker lenders face capital shortfalls. AI disappointment, bond-market pressure and cyber incidents are among the potential triggers for stress.

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Stress risks remain elevated despite resilient markets

The International Monetary Fund (IMF), the institution monitoring global economic and financial stability, released its new stability assessment on 13 October during its annual meetings with the World Bank in Bangkok, Thailand. Markets had weathered multiple shocks and high uncertainty, but the IMF warned that financial stability risks remained elevated. It identified an AI-related market correction, pressure on government bond yields and cyber incidents as potential triggers for stress.[1], [2]

Stronger-than-expected growth, robust corporate earnings and optimism about artificial intelligence had helped markets withstand the shocks. Disappointment over AI investment or profit expectations could instead trigger a correction. Inflation pressure, fiscal imbalances and heavy borrowing by governments and increasingly the private sector were associated with rising sovereign bond yields. Cyber incidents could disrupt financial services or reduce confidence in the system.[1]

Illiquid assets and leverage expose nonbank finance

Insurance companies and pension funds hold more illiquid assets, which take longer to turn into cash. The IMF identified that exposure as a risk during a downturn. In private credit, higher leverage and growing liquidity pressure could restrict the capacity to lend. Hedge funds can support markets, yet borrowed funds and investors crowding into the same trades can amplify stress. These vulnerabilities extend beyond the banking sector.[1]

Bank buffers hold, while weaker lenders face shortfalls

The banking sector remained broadly resilient in a severe stress test combining shocks involving AI, bonds and energy. A group of weaker banks would be undercapitalised in that scenario, however, and its share had been increasing. Emerging markets had also remained resilient. In some economies, weaker policy buffers were a concern; less transparent alternative funding sources raised additional concerns in some frontier markets.[1]

The IMF called for sustainable public debt, central-bank independence and adherence to inflation mandates. Its recommendations also included clear policy communication, stronger cyber resilience and close monitoring of liquidity, leverage and other risks across banks and nonbank institutions.[1]

For more information on this topic, you can read the related columns.

References

  1. News sourceInternational Monetary FundIMF highlights vulnerabilities in nonbank financing↩1↩2↩3↩4↩5
  2. News sourceReutersIMF identifies AI corrections, bond yields and cyberattacks as financial risks↩
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