Global markets appear calm, but the International Monetary Fund ( IMF) has warned that underlying financial vulnerabilities are mounting, driven by tariffs, rising debt, and the rapid growth of nonbank financial institutions (NBFIs).
In its Global Financial Stability Report released Tuesday, the IMF said investors are showing “complacency” even as trade tensions, fiscal imbalances, and geopolitical uncertainties reshape financial conditions worldwide.
Earlier the IMF revealed the global growth outlook with global output expected to ease from 3.3% in 2024 to 3.2% in 2025 and 3.1% in 2026, citing higher US tariffs which slow trade and investment.
Also Read: Trump tariffs to slow global growth to 3.2%; India's growth to stay strong with 6.6% in 2025, says IMF report
Tariffs, debt, and asset prices mask rising vulnerabilities
The report, titled “Shifting Ground Beneath the Calm: Stability Challenges amid Changes in Financial Markets,” noted that markets rebounded quickly after the United States’ April 2 tariff announcement, helped by temporary trade pauses and robust economic data. Asset prices have surged and volatility has eased, but the IMF cautioned that risk valuations are now “well above fundamentals,” raising the possibility of sharp corrections.
“Markets seem to have downplayed the potential effects of tariffs on growth and inflation,” the Fund said. Front-loaded consumption and investment are fading, and near-term global growth is starting to slow, particularly in the US.
Furthermore, debt continues to move toward governments, with expanding fiscal deficits pressuring sovereign bond markets. “An abrupt yield increase — triggered, for instance, by debt sustainability concerns — could strain banks’ balance sheets and pressure open-ended funds,” the report said.
Also Read: IMF upgrades US growth outlook as Trump's tariffs cause less disruption than expected
Nonbanks and system-wide vulnerabilities
The IMF also highlighted the growing role of nonbank financial intermediaries, including insurance companies, pension funds, investment funds, and private credit lenders, whose increasing interconnectedness with banks could amplify shocks.
Tobias Adrian, IMF Financial Counsellor, said, “Stress testing shows that the vulnerabilities of these nonbank intermediaries can quickly transmit to the core banking system, amplifying shocks, and complicating crisis management.”
Nonbanks now hold roughly half of global financial assets and account for half of daily foreign exchange market turnover, more than double their share 25 years ago. While they help channel credit and liquidity, their expansion increases risk-taking and interconnectedness. Stress tests indicate that if nonbanks face downgrades or draw on bank credit lines, US and European banks could see their capital ratios fall sharply, demonstrating how risks can quickly spread.
Liquidity pressures in open-ended funds were also flagged. IMF analysis shows that forced bond sales in US mutual funds, under interest rate shocks and redemption patterns similar to March 2020, could reach nearly $200 billion, including three-quarters in Treasury securities, potentially straining market functioning.
The IMF called for policymakers to “remain attentive to potential risks to inflation, especially where inflation is still above target, and preserve central bank operational independence; curb government deficits; implement internationally agreed-upon prudential standards; strengthen financial sector safety nets and NBFI oversight, and promote effective regulation and supervision of stablecoins.”
The Fund also urged better data collection, forward-looking system-wide stress testing, enhanced coordination across supervisors, and stronger liquidity management tools for nonbanks to reduce the risk of forced asset sales.
In its Global Financial Stability Report released Tuesday, the IMF said investors are showing “complacency” even as trade tensions, fiscal imbalances, and geopolitical uncertainties reshape financial conditions worldwide.
Earlier the IMF revealed the global growth outlook with global output expected to ease from 3.3% in 2024 to 3.2% in 2025 and 3.1% in 2026, citing higher US tariffs which slow trade and investment.
Also Read: Trump tariffs to slow global growth to 3.2%; India's growth to stay strong with 6.6% in 2025, says IMF report
Tariffs, debt, and asset prices mask rising vulnerabilities
The report, titled “Shifting Ground Beneath the Calm: Stability Challenges amid Changes in Financial Markets,” noted that markets rebounded quickly after the United States’ April 2 tariff announcement, helped by temporary trade pauses and robust economic data. Asset prices have surged and volatility has eased, but the IMF cautioned that risk valuations are now “well above fundamentals,” raising the possibility of sharp corrections.
“Markets seem to have downplayed the potential effects of tariffs on growth and inflation,” the Fund said. Front-loaded consumption and investment are fading, and near-term global growth is starting to slow, particularly in the US.
Furthermore, debt continues to move toward governments, with expanding fiscal deficits pressuring sovereign bond markets. “An abrupt yield increase — triggered, for instance, by debt sustainability concerns — could strain banks’ balance sheets and pressure open-ended funds,” the report said.
Also Read: IMF upgrades US growth outlook as Trump's tariffs cause less disruption than expected
Nonbanks and system-wide vulnerabilities
The IMF also highlighted the growing role of nonbank financial intermediaries, including insurance companies, pension funds, investment funds, and private credit lenders, whose increasing interconnectedness with banks could amplify shocks.
Tobias Adrian, IMF Financial Counsellor, said, “Stress testing shows that the vulnerabilities of these nonbank intermediaries can quickly transmit to the core banking system, amplifying shocks, and complicating crisis management.”
Nonbanks now hold roughly half of global financial assets and account for half of daily foreign exchange market turnover, more than double their share 25 years ago. While they help channel credit and liquidity, their expansion increases risk-taking and interconnectedness. Stress tests indicate that if nonbanks face downgrades or draw on bank credit lines, US and European banks could see their capital ratios fall sharply, demonstrating how risks can quickly spread.
Liquidity pressures in open-ended funds were also flagged. IMF analysis shows that forced bond sales in US mutual funds, under interest rate shocks and redemption patterns similar to March 2020, could reach nearly $200 billion, including three-quarters in Treasury securities, potentially straining market functioning.
The IMF called for policymakers to “remain attentive to potential risks to inflation, especially where inflation is still above target, and preserve central bank operational independence; curb government deficits; implement internationally agreed-upon prudential standards; strengthen financial sector safety nets and NBFI oversight, and promote effective regulation and supervision of stablecoins.”
The Fund also urged better data collection, forward-looking system-wide stress testing, enhanced coordination across supervisors, and stronger liquidity management tools for nonbanks to reduce the risk of forced asset sales.
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