## FOREWORD

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### Overview of current risks and context
- Since we last published the Global Financial Stability Report (GFSR) in October 2024, financial stability risks have increased.
- Elevated economic policy uncertainty has led to:
  - increased financial market volatility,
  - a shift in investor confidence toward concern,
  - substantially elevated equity and bond market [tightening] global financial conditions, indicating global financial markets may be at a turning point.
- The GFSR focuses on identifying vulnerabilities that can propagate and amplify when downside risk realizes; assessments are squarely focused on downside risks.

### Recent shocks and emerging stresses
- The global financial system has absorbed a protracted series of shocks in recent years, including:
  - the COVID-19 pandemic in 2020,
  - the global surge of inflation beginning in 2021,
  - Russia’s war in Ukraine starting in 2022.
- More recently, uncertainty about economic policies, notably tariffs, is again testing the resilience of the global financial system.
- Elevated levels of sovereign debt are a concern, given the interaction of financial sector imbalances and government debt; financial imbalances can amplify adverse shocks.

### Role of banks, regulatory posture, and supervisory priorities
- Banks remain at the core of the financial system and have substantially increased levels of capital and liquidity, enhancing capacity to absorb losses.
- Continued, timely, and consistent implementation of Basel III and other internationally-agreed-upon bank regulatory standards will:
  - help ensure a level playing field across jurisdictions,
  - guarantee continued ample capital and liquidity to withstand future shocks.
- Increased focus on proactive supervision of the largest institutions globally is viewed as a key contributor to stability.
- Policy recommendation: adopt a proportionate approach consistent with the Basel Core Principles for Effective Banking Supervision to increase efficiencies in credit provision. This implies:
  - smaller banking institutions should be supervised and regulated in a proportionate manner,
  - simplify requirements for smaller banks while strengthening resilience to shocks.

### Nonbank financial intermediation (NBFI)
- The April 2025 GFSR highlights:
  - the growing role of nonbank financial intermediation (NBFI),
  - increased exposure of banks to NBFIs.
- NBFIs include insurance companies, pension funds, investment funds (mutual funds, exchange-traded funds, hedge funds, private equity, and private credit), and finance companies.
- Growing linkages between banks and nonbanks increase NBFI influence on systemwide financial stability.
- Policy priorities and findings:
  - Improving the regulation of NBFIs should remain a priority.
  - Important advances have been made, including reforms to money market funds, limits to liquidity risks in mutual funds, margin-setting in central counterparties, counterparty risk management practices for broker-dealers, and trading rules in exchanges and electronic trading platforms.
  - Data gaps preclude a complete and timely assessment of vulnerabilities and challenge sound decision making for private sector participants and policy makers.
  - To harness benefits from NBFI growth, it is paramount to strengthen data availability for risk monitoring and assessment so supervisors and the private sector can have a systemwide view of risks and identify poorly governed institutions taking excessive risks.
  - International standard setters are planning further work, including examining cross-border and cross-sector interconnectedness and enhancing international coordination.

### Market infrastructure, technology, and operational resilience
- Sound trading arrangements and infrastructures are essential for maintaining macrofinancial stability.
- A resilient global financial system requires financial “plumbing” to operate smoothly so movements of securities, derivatives, and payments can continue during periods of market volatility.
- Priorities for market infrastructures:
  - prioritize interoperability of various platforms, particularly across borders,
  - embrace innovative technologies—such as blockchain and artificial intelligence—to enhance efficiency and security of payment and settlement systems and contribute to a more stable financial environment.

### Crisis preparedness and resolution
- Even well-regulated financial systems may face shocks severe enough to cause systemic crises; crisis preparedness alongside proactive regulatory policies remains foundational.
- Lessons drawn from the March 2023 banking turmoil:
  - supervisors must have the willingness, legal authority, and ability to act to intervene early in weak institutions,
  - stabilizing the financial system may require a large and rapid provision of liquidity to financial institutions; central banks should further develop their frameworks for emergency liquidity assistance during regular periods,
  - even small banks can pose risks to financial stability; further progress is essential in implementing recovery and resolution frameworks to address weak or failing financial institutions and minimize the need for public funding.
- Ongoing imperative: closely monitor evolving financial vulnerabilities for banks and nonbanks alike, especially interactions of capital markets and the banking system if financial conditions tighten further.

*Tobias Adrian, Financial Counsellor*

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