Story by SpringNewsNG | April 23, 2025

The International Monetary Fund (IMF) has raised the alarm on growing global financial instability, pointing to tightening financial conditions, persistent geopolitical tensions, and escalating trade uncertainties as key drivers of concern.

In its recently published Global Financial Stability Report, the IMF revealed that vulnerabilities are mounting across capital markets, sovereign debt, and especially within the rapidly growing nonbank financial sector.

Global Capital Markets Facing Increased Risks

The report warns that financial risks have become “significantly elevated,” noting that stretched asset valuations and a disproportionate concentration in global capital markets could trigger future volatility. The United States, for instance, now represents nearly 55% of the global equity market, a dramatic rise from 30% two decades ago. Despite some recent market corrections, asset prices in key sectors remain high, prompting fears of further sell-offs in a fragile global economy.

Nonbank Financial Institutions Pose Systemic Risks

The IMF also spotlighted the expanding role of nonbank financial institutions (NBFIs)—including investment funds, insurance companies, and pension funds—as a growing source of risk. These entities have gained influence in global finance, especially since the 2008 financial crisis, but their increasing interconnectedness with traditional banks is raising systemic red flags.

In the U.S., NBFI borrowing now stands at 120% of the common equity tier 1 capital of banks, a statistic the IMF says highlights the “intensifying nexus between banks and nonbanks.” This interdependency means that instability within the NBFI sector could spill over into the banking system.

IMF Calls for Stronger Oversight and Regulation

To address these concerns, the IMF recommends urgent regulatory reforms, including improved risk assessment standards and comprehensive reporting from NBFIs. The goal is to allow regulators to better identify institutions that either support economic growth or introduce dangerous levels of leverage and risk.

While acknowledging the economic value of nonbanks, the IMF emphasized the need for targeted policies to reduce leverage and interconnectedness across financial ecosystems.

“Nonbank leverage isn’t inherently bad,” the IMF noted, “but without stronger oversight, the potential for financial contagion increases.”

Banks Must Remain the Pillar of Global Finance

The report reiterates the critical role of banks in maintaining global financial stability and calls for full and timely implementation of Basel III regulations and other internationally agreed frameworks. Strengthening the capital base and shock resilience of systemically important banks is essential, especially given their growing exposure to nonbank entities.

Sovereign Debt Risks Escalate, Especially in Emerging Markets

Another key area of concern is the rising burden of sovereign debt, particularly in emerging and developing economies. The IMF cautioned that debt levels in many countries are outpacing the growth of financial infrastructure, leading to greater bond market volatility and refinancing risks.

The Fund urged countries to develop robust, transparent frameworks for public debt management, including strategies like the Medium-Term Debt Management Strategy (MTDS), often developed in collaboration with the World Bank. These tools are vital for managing currency mismatches, lowering borrowing costs, and limiting rollover risks.

Bolstering Domestic Financial Markets

The IMF pointed to the increased participation of long-term domestic investors in government bond markets as a positive trend that can help stabilize funding costs. It recommends policies to strengthen domestic capital markets, such as promoting central bond clearing systems and reducing counterparty risks.

Final Word: Decisive Policy Action Needed

As financial conditions tighten globally, the IMF’s overarching message is clear: governments and regulators must act decisively to reduce systemic risks, enhance financial resilience, and safeguard against future economic shocks.

For policymakers around the world, this report serves as a stark reminder that proactive risk management is essential to navigate an increasingly volatile financial landscape.