Geo-Political Tensions Can Affect Financial Stability Of Emerging Economies: IMF
15 April 2025 12:34 PM IST
Financial fragmentation has intensified in recent years amid rising geopolitical tensions, strained ties between the US and China, and Russia’s invasion of Ukraine
Headquarters of International Monetary Fund in Washington (Bloomberg)
Chennai: Concerns about global economic and financial fragmentation due geo-political tensions can disrupt global financial stability, affect cross-border investment, asset prices and reduce lending by banks to the private sector, especially in emerging economies, finds the IMF.
Financial fragmentation has intensified in recent years amid rising geopolitical tensions, strained ties between the United States and China, and Russia’s invasion of Ukraine.
Investment funds are particularly sensitive to geopolitical tensions and tend to reduce cross-border allocations notably to countries with a diverging foreign policy outlook.
Imposition of financial restrictions, increased uncertainty, and cross-border credit and investment outflows triggered by an escalation of tensions could increase banks’ debt rollover risks and funding costs. It could also drive-up interest rates on government bonds, reducing the values of banks’ assets and adding to their funding costs.
At the same time, geopolitical tensions are transmitted to banks through the real economy. The effect of disruptions to supply chains and commodity markets on domestic growth and inflation could exacerbate banks’ market and credit losses, further reducing their profitability and capitalization. The stress is likely to diminish the risk-taking capacity of banks, prompting them to cut lending, further weighing on economic growth.
The financial and real-economy channels are likely to feed off one another, with the overall effect being disproportionately larger for banks in emerging markets and developing economies.
Supervisors, regulators, and financial institutions should be aware of the risks to financial stability stemming from geopolitical tensions and commit to identify, quantify, manage, and mitigate these threats.
Actionable guidelines for supervisors, policymakers should be developed by adopting a systematic approach that employs stress testing and scenario analysis.
Economies reliant on external financing should ensure an adequate level of international reserves, as well as capital and liquidity buffers at financial institutions.
Policymakers should strengthen crisis preparedness and management frameworks to deal with potential financial instability arising from heightened geopolitical tensions.
The global financial safety net—a set of institutions and mechanisms that insure against crises and financing to mitigate their impact—must be reinforced through mutual assistance agreements between countries.
Efforts by international regulatory and standard-setting bodies, such as the Financial Stability Board and the Basel Committee on Banking Supervision, should continue to promote common financial regulations and standards.
Policymakers should be aware that imposing financial restrictions for national security reasons could have unintended consequences for global macro-financial stability.
Financial fragmentation has intensified in recent years amid rising geopolitical tensions, strained ties between the United States and China, and Russia’s invasion of Ukraine.
Investment funds are particularly sensitive to geopolitical tensions and tend to reduce cross-border allocations notably to countries with a diverging foreign policy outlook.
Imposition of financial restrictions, increased uncertainty, and cross-border credit and investment outflows triggered by an escalation of tensions could increase banks’ debt rollover risks and funding costs. It could also drive-up interest rates on government bonds, reducing the values of banks’ assets and adding to their funding costs.
At the same time, geopolitical tensions are transmitted to banks through the real economy. The effect of disruptions to supply chains and commodity markets on domestic growth and inflation could exacerbate banks’ market and credit losses, further reducing their profitability and capitalization. The stress is likely to diminish the risk-taking capacity of banks, prompting them to cut lending, further weighing on economic growth.
The financial and real-economy channels are likely to feed off one another, with the overall effect being disproportionately larger for banks in emerging markets and developing economies.
Supervisors, regulators, and financial institutions should be aware of the risks to financial stability stemming from geopolitical tensions and commit to identify, quantify, manage, and mitigate these threats.
Actionable guidelines for supervisors, policymakers should be developed by adopting a systematic approach that employs stress testing and scenario analysis.
Economies reliant on external financing should ensure an adequate level of international reserves, as well as capital and liquidity buffers at financial institutions.
Policymakers should strengthen crisis preparedness and management frameworks to deal with potential financial instability arising from heightened geopolitical tensions.
The global financial safety net—a set of institutions and mechanisms that insure against crises and financing to mitigate their impact—must be reinforced through mutual assistance agreements between countries.
Efforts by international regulatory and standard-setting bodies, such as the Financial Stability Board and the Basel Committee on Banking Supervision, should continue to promote common financial regulations and standards.
Policymakers should be aware that imposing financial restrictions for national security reasons could have unintended consequences for global macro-financial stability.
( Source : Deccan Chronicle )
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