As Emerging Markets Attract More Nonbank Capital, They Also Face New Challenges

IMF Blog, April 7, 2026

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Emerging-market firms and governments increasingly seek funding from nonbank sources, expanding funding access but raising vulnerability to sudden reversals in capital flows when global shocks occur.
Since the global financial crisis, portfolio flows to emerging markets have increased eightfold, reaching about $4 trillion in cumulative terms, while bank flows rose more modestly.
This summary is drawn from the analytical chapter in the April 2026 Global Financial Stability Report.

Portfolio debt liabilities now average about 15 percent of gross domestic product in emerging markets, up from around 9 percent in 2006.
Eighty percent of this capital is provided by nonbanks, including investment funds, hedge funds, pension funds and insurance companies, twice the share seen 20 years ago.
A one-standard-deviation increase in the CBOE Volatility Index (VIX) is associated with portfolio debt outflows from emerging markets of about 1 percent of quarterly GDP on average (corresponding to a 0.3 standard deviation decline in flows relative to GDP).
Outflows from investment funds are roughly twice as large as the average portfolio debt outflow.
A VIX surge is associated with a decline of 1.3 percent in hedge funds’ holdings of emerging market securities.
Mutual funds retrench by around 0.6 percent—broadly in line with the average response of all nonresident nonbank financial investors.
Holdings by insurance companies and pension funds do not show a statistically significant response to the same shock.

Investment funds:
- Exposed to sudden redemption pressures that can force rapid asset sales.
- Benchmark-driven strategies (passive funds, most ETFs) automatically adjust portfolios when index weights change, increasing risk of synchronized asset sales.
Hedge funds:
- Increasingly important in some emerging markets and often use leverage to amplify returns, which can cause forced selling when volatility rises.
Post-2008 regulatory reforms:
- Constrained global banks’ risk-taking capacity, likely shifting riskier borrowers toward nonbank financing and increasing sensitivity of market-based financing to global risk.
Investor-group heterogeneity:
- Hedge funds and mutual funds are most sensitive to global risk changes.
- Pension funds and insurance companies tend to be more stable.

Private credit (mainly direct lending to companies by nonbank investors) has expanded rapidly in emerging markets.
Estimated assets under management increased fivefold over the past decade to between $50 billion and $100 billion.
Gaps in transparency and data availability in private credit can make it hard to quickly identify vulnerabilities or potential risks to financial stability.

Abrupt retrenchments can:
- Intensify external financing pressures.
- Raise borrowing costs.
- Trigger sharp currency depreciations.
- Lead to financial strains that weigh on economic growth.
These risks have been evident during the war in the Middle East, where several emerging markets are experiencing a reversal of capital flows from nonresident nonbank investors.
Countries with weaker fundamentals—higher public debt burdens, less adequate international reserve buffers, and weaker institutional quality—are likely to experience larger adverse effects.

Monitor composition of the nonbank investor base closely when assessing financial stability risks.
Strengthen institutional quality and maintain adequate fiscal and external buffers to mitigate capital flow volatility and attract more stable, long-term external investment.
Use a combination of tools:
- Monetary policy and exchange rate flexibility, complemented where appropriate by foreign exchange intervention.
- Macroprudential tools to contain vulnerabilities and protect against potential risks.
Calibrate the appropriate mix and sequencing of policy tools using the IMF’s Integrated Policy Framework.
Conduct systemwide stress tests to simulate the impact of severe but plausible economic shocks and ensure financial institutions hold adequate capital and liquidity buffers.
Strengthen international cooperation to close regulatory and data gaps and limit undesirable cross-border effects of global financial shocks.

Based on Chapter 2 of the April 2026 Global Financial Stability Report, Capital Flows to Emerging Markets: The Role of Global Nonbank Investors.