## Enhancing Resilience amid Uncertainty

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### Elevated Financial Stability Risks and Recent Market Developments
- The October 2024 Global Financial Stability Report highlighted stretched asset valuations, growing financial system leverage, and low financial market volatility against a backdrop of heightened levels of economic uncertainty.
- A sharp repricing of risk assets followed the series of tariff announcements by the United States since February and accelerated following the April 2 release of plans for larger-than- expected tariffs. Financial market volatility across stock, currency, and bond markets rose markedly.
- The IMF assesses that global financial stability risks have increased significantly, primarily due to the tightening of global financial conditions (Figure ES.2).
- According to the IMF’s Growth-at-Risk model, macrofinancial downside risks to growth have increased meaningfully.
- The assessments and analyses in this GFSR are based on financial market data available to IMF staff through April 15, 2025.

### Three Forward-Looking Vulnerabilities
- Valuations:
  - Despite recent market turmoil, valuations remain high in some key segments of equity and corporate bond markets, making further readjustments possible if the outlook deteriorates.
  - Economic policy uncertainty remains high, and some macroeconomic indicators have surprised to the downside (see the April 2025 World Economic Outlook), increasing the likelihood of asset price corrections.
- Nonbank Leverage and Interconnectedness:
  - As the hedge fund and asset management sectors grew, aggregate leverage levels and the nexus with the banking sector from which they borrow have increased (Figure ES.4).
  - Some hedge fund strategies have seen a steady increase of leverage recently (Figure ES.5), raising the risk that weakly managed nonbank financial intermediaries may be forced to deleverage when facing margin calls and redemptions.
- Sovereign Bond Market Vulnerabilities:
  - Popular leveraged cash-futures basis trades in core sovereign bond markets and leveraged carry trades in swap markets could unwind and challenge market liquidity (Figure ES.6).
  - Emerging market economies facing the highest real financing costs in a decade may need to refinance debt and fund fiscal spending at higher costs.

### Implications for Emerging Markets, Corporates, Households, and Real Estate
- Emerging Markets:
  - Downside asset price moves could significantly impact emerging markets; their currencies and stock prices have already depreciated due to weakening growth prospects.
  - Investors increasingly expect emerging market central banks to ease, lowering expected carry trade returns and raising the likelihood of capital outflows.
  - Frontier economies, despite improving market conditions, face refinancing risks because sizable amounts of debt are coming due (Figure ES.3).
- Corporates and Households:
  - Global corporate bond spreads have widened recently, reflecting investor concerns about adverse impacts of an economic slowdown on corporate earnings.
  - A decent share of soon-maturing corporate debt carries fixed rates below prevailing market yields; increased credit spreads could challenge refinancing of weaker firms’ debt.
  - Households may be affected through wealth effects from sharp repricing in equities and other asset prices, especially as household allocations to equities and investment funds have risen since before the pandemic.
- Commercial Real Estate:
  - Weaker-than-expected commercial real estate values and still-high interest rates may complicate loan refinancing, particularly for properties with negative equity.

### Geopolitical Risk as a Trigger for Market Stress
- Major geopolitical risk events, especially military conflicts, can lead to substantial declines in stock prices and increases in sovereign risk premiums, particularly in countries with limited fiscal and international reserve buffers.
- Geopolitical events can have cross-border spillovers through trade or financial linkages.

### Policy Recommendations
- Market Functioning and Crisis Tools:
  - Ensure market infrastructures and exchanges can support market functioning.
  - Ensure financial institutions can access central bank liquidity facilities and be prepared to intervene to address severe liquidity or market function stress, especially in core bond and funding markets.
  - Liquidity can be provided to nonbanks with appropriate guardrails (see Chapter 2 of April 2023 Global Financial Stability Report).
- Supervision and Regulation:
  - Full, timely, and consistent implementation of Basel III and other international standards remains key and should be complemented by independent and intensive supervision.
  - Supervisors should enhance risk assessment of linkages between banks and nonbank financial intermediaries.
- Nonbank Reporting and Leverage:
  - Strengthen policies to mitigate nonbank leverage and other vulnerabilities.
  - Enhanced nonbank reporting requirements could help supervisors develop a systemwide and cross-sectoral perspective of risks and distinguish poorly governed and excessive risk-taking institutions.
- Macroprudential Frameworks:
  - Strengthen prudential policy frameworks, including micro- and macroprudential approaches.
  - Countries with insufficient buffers should tighten macroprudential tools to increase resilience while avoiding broad tightening of financial conditions.
  - Where a downturn is leading to financial stress, macroprudential buffers could be released to help banks absorb losses and support credit provision.
- Public Debt Management:
  - Rebuild credibly and growth-friendly buffers given high and rising debt in most countries.
  - Proactively explore liability management operations to manage refinancing risks and reduce or smooth debt servicing profiles.
  - For countries at risk of unsustainable debt, early contact with creditors to coordinate orderly and efficient debt treatment could help avert costly defaults and prolonged loss of market access.
- Crypto-assets and Monetary Sovereignty:
  - Jurisdictions should safeguard monetary sovereignty, strengthen monetary policy frameworks, guard against excessive volatility in capital flows, and adopt unambiguous tax treatment of crypto assets, following the IMF and Financial Stability Board road map.
- Multilateral Preparedness:
  - Strengthen multilateral surveillance and the global financial safety net to enable swift and effective mitigation of financial risks arising from cross-jurisdictional interconnectedness.

*Source: Executive Summary, Global Financial Stability Report: Enhancing Resilience amid Uncertainty (April 2025), International Monetary Fund.*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2025/april/english/execsum.pdf_