Risks to
global financial stability surging after Trump tariffs, warns IMF
World body
says ‘sharp repricing of risks’ possible amid growing concern over role of
‘nonbank’ lenders
IMF warns of
‘major negative shock’ from Trump’s tariffs
Heather
Stewart and Lauren Almeida
Tue 22 Apr
2025 16.15 CEST
The global
financial system is coming under increasing strain as Donald Trump’s trade war
rocks markets, the International Monetary Fund has warned.
“Global
financial stability risks have increased significantly,” the IMF said in its
regular snapshot of the system, urging regulators to be on the alert for
potential crises.
It pointed
to the “sharp repricing of risk assets”, that has followed the US president’s
tariff announcements since February – in particular his 2 April “liberation
day” statement – and warned that there may be more to come.
Published as
finance ministers and central bankers gather in Washington for the IMF’s spring
meetings – and as it downgraded its forecasts for global growth amid tariff
concerns – the Global Financial Stability Review identified what it called
“forward-looking vulnerabilities” in markets.
These
include what it said were overstretched valuations for stocks and bonds in some
areas, even after recent sell-offs; the highly leveraged state of some
financial institutions, including hedge funds; and the vulnerability of some
governments to volatility in sovereign bond markets.
The IMF also
warned economic policy and trade uncertainty were at an all-time high,
“foreboding further shocks, corrections of asset prices, and tightening of
financial conditions”.
Governments
in emerging economies could be hit especially hard by sudden increases in
borrowing costs, the IMF warned, suggesting “investor concerns about public
debt sustainability and other fragilities in the financial sector can worsen in
a mutually reinforcing fashion”.
Meanwhile,
companies may find it more expensive to borrow, if volatile corporate bond
markets drive up the cost of debt, it suggested – while households will be hit
via “wealth effects”, if the value of their pensions and other investments
continues to slide.
The
Washington-based lender expressed particular concern about the growing role of
“nonbank” lenders, which are much less heavily regulated than banks, but can
still pose risks to the wider financial system.
The role of
these lenders, which include pension and investment funds, has grown rapidly in
recent years, after rules on banks were toughened up after the 2008 global
financial crisis.
The IMF
warned of a “deepening nexus” between these nonbank lenders and traditional
banks. It suggested they could be forced to divulge more information to
regulators, which could then identify and rein in “poorly governed and
excessive risk-taking institutions”.
High levels
of borrowing by these nonbank lenders also “imperils market functioning”, the
IMF said, noting these investors had amplified a recent sell-off in US
government bonds due to pressure to meet margin calls. This is when an investor
must provide collateral to cover losses quickly.
Borrowing by
hedge funds could also “exacerbate losses” during periods of market turmoil,
the IMF said. At the hedge funds that make big macroeconomic bets, leverage can
be as high as 40 times the value of their assets, the report found.
The
institution also suggested big global banks could be underestimating the “true
level of risk” attached to their business.
Banks use
the “average risk-weight”, or “RWA density”, as a metric to reflect the level
of risk connected to its business. However, the IMF found that data from
international banks, even those with similar models and overall risk profiles,
showed “wide variation” by this measure.
The IMF also
urged governments to ensure there is sufficient capital and liquidity in the
banking system to cope with a crisis – including by the “full, timely and
consistent implementation” of the so-called Basel 3 rules, devised after the
2008 crisis.
The Bank of
England recently delayed the implementation of the final stage of these rules,
known as Basel 3.1, by a year in the UK, as the chancellor, Rachel Reeves,
pressed regulators to take a more pro-growth approach.
The report
also flagged potential contagion risk in the private credit fund system, which
it said could “spread credit shocks across institutions and countries”.
More
companies are borrowing from private credit funds, it said, and big investors
such as pension funds are increasingly backing foreign direct-lending funds. As
the market becomes more complex and global, “the risk that credit shocks will
propagate from one jurisdiction to others intensifies”, the report said.
Separately
on Tuesday, a member of the Bank’s ratesetting, Megan Greene, said US trade
tariffs were more likely to push down UK inflation than to drive it up, but
that there were risks on both sides.
Greene told
Bloomberg: “The tariffs represent more of a disinflationary risk than an
inflationary risk.” However, she added: “There’s a tonne of uncertainty around
this, but there are both inflationary and disinflationary forces.”
On Monday,
Trump renewed his attack against the Federal Reserve chair, Jerome Powell, and
the independence of the US central bank.
Greene said
that “credibility is the currency of central banks and I think independence is
quite an important piece of that”. She said the Bank could credibly try to hit
its targets because it was free to make its own decisions.
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