[Rockstar]

Financial stability risks have increased rapidly as the resilience of the global financial system has been tested by higher inflation and fragmentation risks.

https://www.imf.org/en/Publications/...-GFSREA2023001

Chapter 1 analyzes the recent turmoil in the banking sector and the challenges posed by the interaction between tighter monetary and financial conditions and the buildup in vulnerabilities since the global financial crisis. The emergence of stress in financial markets complicates the task of central banks at a time when inflationary pressures are proving to be more persistent than anticipated. Smaller and riskier emerging markets continue to confront worsening debt sustainability trends. Chapter 2 examines nonbank financial intermediaries (NBFIs) and the vulnerabilities that can emerge from elevated leverage, liquidity mismatches, and high levels of interconnectedness. Tools to tackle the financial stability consequences of NBFI stress are proposed, underscoring that direct access to central bank liquidity could prove necessary in times of stress, but implementing appropriate guardrails is paramount. Chapter 3 analyzes the effect of geopolitical tensions on financial fragmentation and explores their implications for financial stability—including through potential capital flow reversals, disruptions of cross-border payments, impact on banks’ funding costs, profitability, and credit provision, and more limited opportunities for international risk diversification. Based on the findings, it draws policy recommendations aimed at strengthening financial oversight, building larger buffers, and enhancing international cooperation.

Full report: https://www.imf.org/-/media/Files/Pu...lish/text.ashx

Rising geopolitical tensions have intensified con- cerns about global economic and financial fragmen- tation. Geopolitical tensions have increased globally over the past few years amid deteriorating diplomatic ties between the United States and China, and Russia’s invasion of Ukraine.1 This increase is reflected in the growing incidence of geopolitical threats and con- flicts, a rise in military spending across economies, and increased disagreement in the voting behavior of the United States and China on foreign policy issues in the United Nations (Figure 3.1). The escalation in geopolitical tensions has raised concerns about greater geoeconomic fragmentation—a policy-driven reversal of economic and financial integration, often guided by strategic considerations (Aiyar and others 2023)—that could be costly for the world economy.2