## Chapter 2 Summary — Capital Flows to Emerging Markets: The Role of Global Nonbank Investors

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### Overview
- Cross-border portfolio flows to emerging markets have risen sharply since the global financial crisis, driven largely by nonbank financial investors.
- These flows support development and deepening of financial markets and expand financing opportunities, but introduce vulnerabilities, including heightened sensitivity to shifts in global risk sentiment.
- This chapter uses granular data on cross-border holdings of global non-bank financial investors to analyze transmission of global financial shocks to emerging markets and to outline policy options to strengthen resilience to capital flow volatility.

### Changes since the 2008 global financial crisis
- The 2008 global financial crisis marked a turning point in the relative sensitivity of cross‑border bank and portfolio liability flows to global risk sentiment.
- Since then:
  - Cross-border bank lending has become less sensitive to shifts in global risk, reflecting in part post-crisis regulatory reforms that constrained global banks’ risk-taking capacity.
  - Portfolio debt liability flows have remained more sensitive to changes in global risk conditions.
- The sensitivity of portfolio flows is particularly pronounced in emerging markets compared to advanced economies, especially in countries with:
  - weaker institutional quality,
  - less adequate international reserves buffers, or
  - higher public‑debt‑to‑GDP ratios.

### Investor heterogeneity and transmission channels
- Sensitivity to global risk varies significantly across nonbank investor types.
- Hedge funds and investment funds react more strongly to shifts in global risk sentiment than other nonbanks.
- Within the investment fund sector, passive mutual funds and exchange-traded funds show the greatest sensitivity.
- During periods of global market stress, issuers in countries that rely more on these risk-sensitive investors face:
  - tighter financial conditions,
  - reduced debt issuance, and
  - wider sovereign and corporate bond spreads,
  - with potential adverse implications for macrofinancial stability.

### Vulnerabilities and areas of concern
- The composition of a country’s nonbank financial investor base is an important consideration for policymaking.
- Rapid expansion of private credit markets and stablecoins in emerging markets warrants continued, proportionate monitoring, particularly where interlinkages with regulated financial institutions are material.
- Systemwide stress from sudden capital flow reversals can be amplified when investor bases are concentrated in more risk-sensitive nonbank types.

### Policy recommendations and tools
- Emerging markets, especially those reliant on more risk-sensitive investors, could benefit from:
  - strengthening institutional quality,
  - building robust fiscal and external buffers, and
  - pursuing proactive risk management consistent with the IMF’s Integrated Policy Framework.
- Systemwide stress tests can help gauge financial system resilience to sudden capital flow reversals and ensure financial institutions hold adequate capital and liquidity buffers.
- International cooperation is essential to close regulatory and data gaps and to limit the propagation and amplification of global financial shocks.

*Chapter 2 Summary, Global Financial Stability Report, April 2026*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2026/april/english/ch2sum.pdf_