## FOREWORD

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### Overview: resilience amid the war in the Middle East
- The global financial system has so far weathered the war in the Middle East and the energy shock it brought with a degree of resilience.
- Markets have remained broadly orderly, corrections have been contained, and short-term funding markets have continued to function.
- News related to the war has oscillated between escalation and de-escalation, including the recent two-week ceasefire, generating bouts of volatility in energy prices and asset prices but not triggering sustained market drawdowns that give rise to acute liquidity stress, margin calls, and forced deleveraging.
- Historical experience suggests geopolitical risks tend to have a limited and often short-lived effect on global asset prices; this pattern has been evident particularly in advanced economies, while emerging markets have been more sensitive to shifts in global risk sentiment.

### Structural resilience drivers
- Households and corporates began from a meaningfully stronger position than in previous episodes of stress, with cash buffers accumulated during the postpandemic recovery providing a cushion against higher energy prices, tighter financial conditions, and income volatility.
- The banking sector is broadly well-capitalized, strengthened by post–global financial crisis reforms, with higher capital and liquidity buffers enhancing loss-absorbing capacity and limiting the propagation of stress.
- Major emerging markets have strengthened resilience through improved policy frameworks that have made monetary and fiscal institutions more credible, supporting stronger growth in several regions.
- Structural improvements in markets and central bank facilities have helped, including:
  - the Federal Reserve’s Standing Repo Facility and the Bank of England’s Contingent NBFI Repo Facility;
  - expanded central clearing in government bond, repo, and derivatives markets, which has reduced counterparty risk, improved netting, increased transparency, and improved the capacity for the system to manage large transactions during volatile periods.

### Amplification risks and vulnerabilities
- The contained market impact of geopolitical shocks does not imply vulnerabilities are benign; it may indicate markets have not fully priced more adverse scenarios.
- The Global Financial Stability Report’s vulnerability-based framework remains relevant: assessing risks requires focus on how vulnerabilities—such as leverage, maturity and liquidity mismatches, and interconnectedness—can amplify strains in the financial sector.
- Chapter 1 highlights vulnerabilities that could interact with adverse shocks to generate amplification effects:
  - More urgent vulnerabilities: elevated debt-to-GDP levels, rollover risks, and the bank–sovereign nexus, which make bond markets more fragile to amplification, including through liquidity problems and forced selling by option sellers, leveraged exchange funds, and hedge funds.
  - Growing but less urgent vulnerabilities: private credit—where problematic structures such as retail and semiliquid funds are still a moderate share of the market—and sizeable investments in artificial intelligence that could raise debt levels and interconnectedness in the financial system.
- The current conflict remains highly unpredictable; circumstantial factors could give way to a prolonged war, triggering stress through channels not yet fully apparent.

### Emerging markets: specific risks and dynamics
- Cross-border portfolio flows have become increasingly dominated by nonbank investors, some of which are highly sensitive to global risk conditions (Chapter 2).
- In periods of stress, when carry trades unwind and risk appetite shifts, emerging markets can face capital outflows and tighter domestic financial conditions, with adverse implications for macrofinancial stability.
- In periods of war, asset prices seldom reflect the plight of more vulnerable economies suffering from energy and—should the conflict persist—food insecurities, which can introduce additional fiscal spending and external borrowings that weaken fundamentals.

### Constrained policy headroom and policy priorities
- Constrained policy headroom compounds vulnerabilities:
  - High volumes of sovereign bond issuance needed to finance chronically large and persistent fiscal deficits limit the scope for fiscal policy to act countercyclically.
  - Persistent inflation pressures can reduce the scope to use monetary policy to stabilize financial conditions during stress.
- Policy priorities to safeguard financial stability:
  - Timely monitoring of market vulnerabilities and swift action to address them.
  - Targeted macroprudential policies to mitigate risk buildup.
  - Effective crisis preparedness, including ensuring backstops such as central bank liquidity facilities are operationally ready and can be deployed swiftly to support market functioning.
  - Close monitoring and oversight of both banks and nonbanks.
  - In emerging markets, using the IMF Integrated Policy Framework to guide appropriate foreign exchange rate intervention and capital flow management measures.
  - Strengthening governance frameworks for central banks and financial sector supervisors, rigorous implementation of international standards, improving data collection, closing information gaps in nonbank finance, enhancing cross-border cooperation, and completing key regulatory reforms.

### Closing message
- The task for policymakers is not to predict the next shock, but to ensure vulnerabilities are understood, buffers are rebuilt, and the system remains capable of absorbing stress without amplifying it.
- The resilience observed so far is best viewed not as an endpoint, but as a reminder of the work that remains to be done.

Tobias Adrian
Financial Counsellor

*International Monetary Fund | April 2026*

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