## execsum

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---

### Shifting Ground beneath the Calm — Signs of shifting ground and market developments
- Global financial markets appear calm despite continued trade and geopolitical uncertainty.
- IMF’s growth-at-risk framework shows that risks to global financial stability remain elevated.
- Continued appreciation of risk asset prices; valuations of some risk assets have once again become stretched after the brief correction from the April 2 tariff announcement by the United States.
- US dollar has depreciated by 10 percent so far this year and has decoupled relative to wide US–G10 interest rate differentials in the months following the announcement, amid concerns about US policy uncertainty and investors reassessing the dollar’s decade-long bull run.
- Changing asset correlations could exacerbate any further abrupt correction of asset prices, straining financial markets.
- Debt has continued to shift toward the government sector as expanding global fiscal deficits propel sovereign bond issuance.
  - In major advanced economies, sovereign bond markets increasingly depend on price-sensitive investors, exerting upward pressure on term premiums and long-term yields.
  - In emerging markets, governments have turned to domestic investors for financing, reducing reliance on foreign currency debt but potentially creating a stronger bank-sovereign nexus.
- Growing size of nonbank financial intermediaries (NBFIs) and deeper ties with banks have heightened sectoral interconnection.
  - Expanding role of NBFIs in core sovereign bond markets and corporate debt markets, including participation of retail investors in private credit, raising risks of excessive risk taking and interconnectedness.

### Vulnerabilities and uncertainties — key findings and metrics
- Bond market functioning is on shakier footing despite stabilization since the April 2 tariff-induced sell-off: steepening yield curves, more negative swap spreads, and erosion of convenience yields.
- Forced US Treasury liquidations scenario: forced US Treasury liquidations as a result of large fund outflows and an abrupt increase in yields could reach almost $300 billion.
- Banking sector stress test results: in an adverse macroeconomic scenario, about 18 percent of global banks by assets would see their Common Equity Tier 1 capital ratio fall below the important threshold of 7 percent plus a G-SIB buffer.
  - With additional shocks to NBFIs, this share of weak banks by assets could increase to 21 percent, highlighting bank–NBFI linkages.
- Emerging markets and government debt: emerging market government debt has grown significantly across most countries but the structure has increasingly diverged.
  - Stronger emerging markets have financed debt largely from domestic resident investors in local currency; an increase in the resident investor share is associated with a decline in sensitivity of emerging market bonds to shocks to the VIX.
  - Weaker emerging market economies face mounting debt service burdens, with long-term real interest rates (r) that are higher than long-term growth rates (g), which could expose them to funding risks and make fiscal consolidation challenging.
- Corporate sector risks: tariffs could pressure corporate profit margins, adversely affect debt-servicing abilities, and make stretched corporate equity and bond valuations vulnerable.
  - In a scenario with phased-in additional tariffs and higher refinancing costs, the share of corporate debt with an interest coverage ratio falling below 1 would reach 55 percent in some countries.
  - Liquidity remains strained among more vulnerable borrowers in leveraged loan and private credit markets; borrower downgrades have increased.
- Stablecoins: stablecoins—led by stablecoins pegged to the US dollar—are growing rapidly and playing a larger role in financial intermediation.
  - Three main financial stability implications: (1) currency substitution and reduced policy effectiveness in weaker economies; (2) potential change in bond market structure with implications for credit disintermediation; (3) investor runs on stablecoins could generate forced selling of reserve assets. Systemic effects would be conditional on stablecoins’ continued growth.
- Foreign exchange market vulnerabilities: despite deep liquidity, FX markets remain vulnerable to episodes of increased macrofinancial uncertainty.
  - Flight to quality and increased hedging demand can raise foreign currency funding costs and impair FX market liquidity, reflected in wider bid-ask spreads and heightened exchange rate return volatility.
  - Structural fragilities include large currency mismatches, concentrated dealer activity, increased NBFI involvement, heightened settlement risk, and operational risks to FX market infrastructure (technical failures and cyberattacks).
  - Strains in FX market conditions can spill over into other asset classes and tighten broader financial conditions.

### Policy recommendations
- Preserve macroeconomic stability:
  - For tariffed jurisdictions facing weaker demand, a gradual easing of the policy rate could be appropriate.
  - For countries where inflation is still above target, central banks should proceed carefully with any monetary easing and maintain commitment to price stability.
  - Central bank operational independence remains crucial to anchor inflation expectations.
- Fiscal policy and bond market resilience: urgent fiscal adjustments to reduce deficits are crucial to protect sovereign bond market resilience.
  - Implement more ambitious fiscal measures to reduce sovereign risks.
  - Improve market structure: expand central clearing for cash bond and repo transactions, improve balance sheet efficiency, and boost transparency.
  - Maintain standing liquidity facilities to backstop bond markets.
- Emerging markets policy toolbox: where fragility signs emerge (rising inflation expectations, surges in exchange rate and capital flow volatility), deploy foreign exchange interventions, macroprudential measures, and capital flow management consistent with the IMF’s Integrated Policy Framework, provided these do not impair fiscal and monetary adjustments.
  - Further develop local bond markets by enhancing macroeconomic fundamentals (raise domestic financial savings; strengthen fiscal and monetary credibility), enhance predictability and transparency of debt issuance, develop efficient repo and money markets, strengthen primary dealer frameworks, and diversify the investor base.
- Banking sector resilience: improve capitalization and implement internationally agreed-upon standards (notably Basel III).
  - Review undue regulatory complexity without undermining resilience or international minimum standards.
  - Strengthen financial sector safety nets: establish emergency liquidity assistance frameworks, ensure banks can access central bank funding quickly, and advance recovery and resolution frameworks to manage shocks without systemic disruption or taxpayer losses.
- NBFIs and digital asset oversight: improve data collection, coordination, and analysis (including cross-border).
  - Improve and expand availability and usability of liquidity management tools for investment funds.
  - Implement the Financial Stability Board’s high-level recommendations for stablecoins: establish effective risk-management frameworks, safeguard anti-money laundering/combating the financing of terrorism measures, and ensure relevant authorities have necessary powers and cooperation mechanisms.
- Foreign exchange market resilience and global safety nets: enhance surveillance, including systematic FX liquidity stress testing that captures interactions with underlying vulnerabilities.
  - Close FX data gaps; ensure capital and liquidity buffers in financial institutions are adequate and supported by robust crisis management frameworks.
  - Strengthen the global financial safety net—sufficient international reserve buffers and expanded central bank swap lines—and align macroeconomic policy mix with the IMF’s Integrated Policy Framework.

### Operational resilience and settlement risk (Section 2)
- Enhancing the operational resilience of key foreign exchange market participants, including against cyber risks, could further reduce settlement risks.
- Promoting broader use of payment-versus-payment arrangements could further reduce settlement risks.

*International Monetary Fund | October 2025 — Executive Summary, Section 1; Source: execsum - Section 2*

### Section 1

### Shifting Ground beneath the Calm

### Signs of shifting ground and market developments
- Global financial markets appear calm despite continued trade and geopolitical uncertainty.  
- IMF’s growth-at-risk framework shows that risks to global financial stability remain elevated.  
- Continued appreciation of risk asset prices; valuations of some risk assets have once again become stretched after the brief correction from the April 2 tariff announcement by the United States.  
- US dollar has depreciated by 10 percent so far this year and has decoupled relative to wide US–G10 interest rate differentials in the months following the announcement, amid concerns about US policy uncertainty and investors reassessing the dollar’s decade-long bull run.  
- Changing asset correlations could exacerbate any further abrupt correction of asset prices, straining financial markets.  
- Debt has continued to shift toward the government sector as expanding global fiscal deficits propel sovereign bond issuance.  
  - In major advanced economies, sovereign bond markets increasingly depend on price-sensitive investors, exerting upward pressure on term premiums and long-term yields.  
  - In emerging markets, governments have turned to domestic investors for financing, reducing reliance on foreign currency debt but potentially creating a stronger bank-sovereign nexus.  
- Growing size of nonbank financial intermediaries (NBFIs) and deeper ties with banks have heightened sectoral interconnection.  
  - Expanding role of NBFIs in core sovereign bond markets and corporate debt markets, including participation of retail investors in private credit, raising risks of excessive risk taking and interconnectedness.

### Vulnerabilities and uncertainties — key findings and metrics
- Bond market functioning is on shakier footing despite stabilization since the April 2 tariff-induced sell-off: steepening yield curves, more negative swap spreads, and erosion of convenience yields.  
- Forced US Treasury liquidations scenario: forced US Treasury liquidations as a result of large fund outflows and an abrupt increase in yields could reach almost $300 billion.  
- Banking sector stress test results: in an adverse macroeconomic scenario, about 18 percent of global banks by assets would see their Common Equity Tier 1 capital ratio fall below the important threshold of 7 percent plus a G-SIB buffer.  
  - With additional shocks to NBFIs, this share of weak banks by assets could increase to 21 percent, highlighting bank–NBFI linkages.  
- Emerging markets and government debt: emerging market government debt has grown significantly across most countries but the structure has increasingly diverged.  
  - Stronger emerging markets have financed debt largely from domestic resident investors in local currency; an increase in the resident investor share is associated with a decline in sensitivity of emerging market bonds to shocks to the VIX.  
  - Weaker emerging market economies face mounting debt service burdens, with long-term real interest rates (r) that are higher than long-term growth rates (g), which could expose them to funding risks and make fiscal consolidation challenging.  
- Corporate sector risks: tariffs could pressure corporate profit margins, adversely affect debt-servicing abilities, and make stretched corporate equity and bond valuations vulnerable.  
  - In a scenario with phased-in additional tariffs and higher refinancing costs, the share of corporate debt with an interest coverage ratio falling below 1 would reach 55 percent in some countries.  
  - Liquidity remains strained among more vulnerable borrowers in leveraged loan and private credit markets; borrower downgrades have increased.  
- Stablecoins: stablecoins—led by stablecoins pegged to the US dollar—are growing rapidly and playing a larger role in financial intermediation.  
  - Three main financial stability implications: (1) currency substitution and reduced policy effectiveness in weaker economies; (2) potential change in bond market structure with implications for credit disintermediation; (3) investor runs on stablecoins could generate forced selling of reserve assets. Systemic effects would be conditional on stablecoins’ continued growth.  
- Foreign exchange market vulnerabilities: despite deep liquidity, FX markets remain vulnerable to episodes of increased macrofinancial uncertainty.  
  - Flight to quality and increased hedging demand can raise foreign currency funding costs and impair FX market liquidity, reflected in wider bid-ask spreads and heightened exchange rate return volatility.  
  - Structural fragilities include large currency mismatches, concentrated dealer activity, increased NBFI involvement, heightened settlement risk, and operational risks to FX market infrastructure (technical failures and cyberattacks).  
  - Strains in FX market conditions can spill over into other asset classes and tighten broader financial conditions.

### Policy recommendations
- Preserve macroeconomic stability:  
  - For tariffed jurisdictions facing weaker demand, a gradual easing of the policy rate could be appropriate.  
  - For countries where inflation is still above target, central banks should proceed carefully with any monetary easing and maintain commitment to price stability.  
  - Central bank operational independence remains crucial to anchor inflation expectations.  
- Fiscal policy and bond market resilience: urgent fiscal adjustments to reduce deficits are crucial to protect sovereign bond market resilience.  
  - Implement more ambitious fiscal measures to reduce sovereign risks.  
  - Improve market structure: expand central clearing for cash bond and repo transactions, improve balance sheet efficiency, and boost transparency.  
  - Maintain standing liquidity facilities to backstop bond markets.  
- Emerging markets policy toolbox: where fragility signs emerge (rising inflation expectations, surges in exchange rate and capital flow volatility), deploy foreign exchange interventions, macroprudential measures, and capital flow management consistent with the IMF’s Integrated Policy Framework, provided these do not impair fiscal and monetary adjustments.  
  - Further develop local bond markets by enhancing macroeconomic fundamentals (raise domestic financial savings; strengthen fiscal and monetary credibility), enhance predictability and transparency of debt issuance, develop efficient repo and money markets, strengthen primary dealer frameworks, and diversify the investor base.  
- Banking sector resilience: improve capitalization and implement internationally agreed-upon standards (notably Basel III).  
  - Review undue regulatory complexity without undermining resilience or international minimum standards.  
  - Strengthen financial sector safety nets: establish emergency liquidity assistance frameworks, ensure banks can access central bank funding quickly, and advance recovery and resolution frameworks to manage shocks without systemic disruption or taxpayer losses.  
- NBFIs and digital asset oversight: improve data collection, coordination, and analysis (including cross-border).  
  - Improve and expand availability and usability of liquidity management tools for investment funds.  
  - Implement the Financial Stability Board’s high-level recommendations for stablecoins: establish effective risk-management frameworks, safeguard anti-money laundering/combating the financing of terrorism measures, and ensure relevant authorities have necessary powers and cooperation mechanisms.  
- Foreign exchange market resilience and global safety nets: enhance surveillance, including systematic FX liquidity stress testing that captures interactions with underlying vulnerabilities.  
  - Close FX data gaps; ensure capital and liquidity buffers in financial institutions are adequate and supported by robust crisis management frameworks.  
  - Strengthen the global financial safety net—sufficient international reserve buffers and expanded central bank swap lines—and align macroeconomic policy mix with the IMF’s Integrated Policy Framework.

*International Monetary Fund | October 2025 — Executive Summary, Section 1*

### Section 2

### execsum - Section 2

### Operational resilience and settlement risk
- Enhancing the operational resilience of key foreign exchange market participants, including against cyber risks, could further reduce settlement risks.
- Promoting broader use of payment-versus-payment arrangements could further reduce settlement risks.

*Source: execsum - Section 2*

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