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INTERNATIONAL MONETARY FUND
GLOBAL FINANCIAL STABILITY REPORT
Shockwaves from the War in Ukraine Test the Financial System’s Resilience
2022
APR
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©2022 International Monetary Fund
IMF CSF Creative Solutions Division Composition: AGS, An RR Donnelley Company
Cataloging-in-Publication Data
IMF Library
Names: International Monetary Fund.
Title: Global financial stability report.
Other titles: GFSR | World economic and financial surveys, 0258–7440
Description: Washington, DC : International Monetary Fund, 2002- | Semiannual | Some issues also have thematic titles. | Began with issue for March 2002.
Subjects: LCSH: Capital market—Statistics—Periodicals. | International finance—Forecasting—Periodicals. | Economic stabilization—Periodicals.
Classification: LCC HG4523.G557
ISBN 979-8-40020-529-3 (Paper)
979-8-40020-559-0 (ePub)
979-8-40020-577-4 (PDF)
Disclaimer: The Global Financial Stability Report (GFSR) is a survey by the IMF staff published twice a year, in the spring and fall. The report draws out the financial ramifications of economic issues highlighted in the IMF’s World Economic Outlook (WEO). The report was prepared by IMF staff and has benefited from comments and suggestions from Executive Directors following their discussion of the report on April 11, 2022. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.
Recommended citation: International Monetary Fund. 2022. Global Financial Stability Report—Shockwaves from the War in Ukraine Test the Financial System’s Resilience. Washington, DC, April.
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Contents
Assumptions and Conventions
Further Information
Preface
Foreword
Executive Summary
IMF Executive Board Discussion of the Outlook, April 2022
Chapter 1 The Financial Stability Implications of the War in Ukraine
Chapter 1 at a Glance
The War in Ukraine Raises Immediate Financial Stability Risks and Questions about the Longer-Term Impact on Markets
Implications of Higher Commodity Prices for Monetary Policy
Transmission Channels of the War through Financial Intermediaries and Markets
Emerging Markets Have Come under Pressure, with Notable Differences across Countries
Financial Vulnerabilities Remain Elevated in China amid Ongoing Stress in the Property Development Sector and COVID-19 Risks
Selected Medium-Term Structural Challenges Policymakers Will Need to Confront
Policy Recommendations
Policy Recommendations to Address Specific Financial Stability Risks
Box 1.1. Extreme Volatility in Commodities: The Nickel Trading Suspension
References
Chapter 2 The Sovereign-Bank Nexus in Emerging Markets: A Risky Embrace
Chapter 2 at a Glance
Introduction
Sovereign-Bank Interlinkages: Conceptual Framework
Relevance of the Sovereign-Bank Nexus in Emerging Markets: Some Stylized Facts
Deepening of the Sovereign-Bank Nexus during the COVID-19 Pandemic
Measuring the Strength of the Sovereign-Bank Nexus
Evidence about the Transmission Channels
Conclusion and Policy Recommendations
Box 2.1. The Drivers of Banks’ Sovereign Debt Exposure in Emerging Markets
References
Chapter 3 The Rapid Growth of Fintech: Vulnerabilities and Challenges for Financial Stability
Chapter 3 at a Glance
Introduction
Fintechs in Banking: Conceptual Framework and Risks
Case Study: Neobanks
Case Study: Fintechs in the US Home Mortgage Market
Decentralized Finance: Vulnerable Efficiency
Financial Stability and Policy Issues
References
Tables
Table 3.1. Comparison of Decentralized Finance and Traditional Financial Services
Figures
Figure 1.1. Russian and Ukrainian Assets Have Come under Heavy Pressure Following the War in Ukraine
Figure 1.2. Impact of the War in Ukraine on Commodities
Figure 1.3. Impact of the War in Ukraine on Financial Assets
Figure 1.4. Financial Market Volatility Has Picked Up Dramatically
Figure 1.5. Global Financial Conditions
Figure 1.6. Global Growth-at-Risk
Figure 1.7. Drivers of Advanced Economy Bond Yields
Figure 1.8. Increase in Advanced Economy Policy Rates
Figure 1.9. A Challenging Normalization Process
Figure 1.10. Inflation and Interest Rates in Emerging Markets
Figure 1.11. Foreign Bank Exposures to Russia and Ukraine
Figure 1.12. Over-the-Counter Derivative Exposures of International and Domestic Banks in Russia, End-2021
Figure 1.13. Exposure to Russian Assets by Foreign Nonbank Financial Intermediaries
Figure 1.14. Investor Challenges in Russian Security Markets
Figure 1.15. Impact from Russia’s Exclusion from Global Benchmark Indices
Figure 1.16. Commodity Trading Companies Have Been Exposed to a Spike in Volatility
Figure 1.17. Short-Term Dollar Funding Tensions and Market Liquidity
Figure 1.18. Corporate Sector amid the War in Ukraine
Figure 1.19. Emerging Market Financial Spillovers
Figure 1.20. Emerging Market Portfolio Flow Pressures Have Intensified
Figure 1.21. Crypto Asset Markets
Figure 1.22. Stress in the Chinese Property Development Sector
Figure 1.23. Chinese Property Development Spillovers
Figure 1.24. The War in Ukraine Tests the Climate Challenge
Figure 1.1.1. The Nickel Market Short Squeeze in March 2022
Figure 2.1. Developments in Emerging Market Public Debt and Banks’ Sovereign Exposures
Figure 2.2. Fiscal Vulnerabilities in Emerging Markets
Figure 2.3. Banks’ Exposure to Sovereign Debt in Emerging Markets
Figure 2.4. Key Channels of the Sovereign-Bank Adverse Feedback Loop
Figure 2.5. Association between Emerging Market Sovereign and Banking Sector Default Risk
Figure 2.6. Sovereign Debt and Banking Crises in a Historical Context: Emerging Markets versus Advanced Economies
Figure 2.7. Sovereign-Bank Nexus in Emerging Markets during the COVID-19 Pandemic
Figure 2.8. Transmission of Risks through the Sovereign-Bank Nexus: Strength of the Main Channels across Emerging Markets
Figure 2.9. Sovereign and Bank Default Risk and Tightening of Global Financial Conditions in Emerging Markets
Figure 2.10. Transmission of Sovereign Risk through the Exposure Channel
Figure 2.11. The Banking Sector Safety Net in Emerging Market Economies
Figure 2.12. The Effects of Sovereign Downgrades on Firms
Figure 2.1.1. Bank Holdings of Sovereign Debt
Figure 2.1.2. Drivers of Bank Holdings of Sovereign Debt in Emerging Markets
Figure 3.1. The Rise of Fintech Firms and Decentralized Finance
Figure 3.2. Fintechs in the Core Banking Intermediation Chain
Figure 3.3. The Increasing Relevance of Neobanks
Figure 3.4. Client Profile of Neobanks
Figure 3.5. Credit Risk Profile
Figure 3.6. Margins, Profitability, and Liquidity Profiles of Neobanks
Figure 3.7. Fintechs in the US Home Mortgage Market
Figure 3.8. Recent Development of DeFi Lending
Figure 3.9. Decentralized Finance Market Risks
Figure 3.10. Decentralized Finance Liquidity Risks
Figure 3.11. Cyberattacks on Decentralized Finance
Figure 3.12. Efficiency and Risks of Decentralized Finance
Online Boxes and Annexes
Online Box 1.1. Indicator-Based Framework Update
Online Annex 2.1. Data Sources and Sample
Online Annex 2.2. The Role of Nonbank Financial Institutions in the Nexus
Online Annex 2.3. Additional Stylized Facts
Online Annex 2.4. The Drivers of Banks’ Holdings of Sovereign Debt in Emerging Markets
Online Annex 2.5. Measuring the Strength of the Nexus
Online Annex 2.6. Exposure Channel Analysis
Online Annex 2.7. Safety Net Channel Analysis
Online Annex 2.8. The Macroeconomic Channel Analysis
Online Annex 3.1. Case Study on Neobanks
Online Annex 3.2. Case Study: US Mortgage Market
Online Annex 3.3. Risk Analysis on DeFi Lending
Online Annex 3.4. Efficiency Analysis on Financial Institutions and DeFi Platforms
Editor’s Note (April 22, 2022)
This online version of the GFSR has been updated to reflect the following changes to the version published online on April 13, 2022:
- Chapter 3, Figure 3.11, panel 1 subtitle on page 79: “(Billions of US dollars)” was corrected to “(Millions of US dollars)”
Assumptions and Conventions
The following conventions are used throughout the Global Financial Stability Report (GFSR):
. . . to indicate that data are not available or not applicable;
— to indicate that the figure is zero or less than half the final digit shown or that the item does not exist;
– between years or months (for example, 2021–22 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years or months (for example, 2021/22) to indicate a fiscal or financial year.
“Billion” means a thousand million.
“Trillion” means a thousand billion.
“Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
If no source is listed on tables and figures, data are based on IMF staff estimates or calculations.
Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
Further Information
Corrections and Revisions
The data and analysis appearing in the Global Financial Stability Report are compiled by the IMF staff at the time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness. When errors are discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and on the IMF eLibrary (see below). All substantive changes are listed in the online table of contents.
Print and Digital Editions
Print copies of this Global Financial Stability Report can be ordered from the IMF bookstore at imfbk.st/516157.
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Preface
The Global Financial Stability Report (GFSR) assesses key vulnerabilities the global financial system is exposed to. In normal times, the report seeks to play a role in preventing crises by highlighting policies that may mitigate systemic risks, thereby contributing to global financial stability and the sustained economic growth of the IMF’s member countries.
The analysis in this report was coordinated by the Monetary and Capital Markets (MCM) Department under the general direction of Tobias Adrian, Director. The project was directed by Fabio Natalucci, Deputy Director; Ranjit Singh, Assistant Director; Nassira Abbas, Deputy Division Chief; Antonio Garcia Pascual, Deputy Division Chief; Evan Papageorgiou, Deputy Division Chief; Mahvash Qureshi, Division Chief; and Jérôme Vandenbussche, Deputy Division Chief. It benefited from comments and suggestions from the senior staff in the MCM Department.
Individual contributors to the report were Jose Abad, Sergei Antoshin, Parma Bains, Liumin Chen, Yingyuan Chen, Fabio Cortes, Reinout De Bock, Andrea Deghi, Mohamed Diaby, Dimitris Drakopoulos, Tor-sten Ehlers, Salih Fendoglu, Charlotte Gardes-Landolfni, Deepali Gautam, Rohit Goel, Sanjay Hazarika, Frank Hespeler, Henry Hoyle, Shoko Ikarashi, Tara Iyer, Phakawa Jeasakul, Esti Kemp, Oksana Khadarina, Sheheryar Malik, Fabiana Melo, Junghwan Mok, Kleopatra Nikolaou, Natalia Novikova, Tomas Piontek, Patrick Schneider, Nobuyasu Sugimoto, Hamid Reza Tabarraei, Tomohiro Tsuruga, Jeffrey David Williams, Hong Xiao, Yizhi Xu, Dmitry Yakovlev, Mustafa Yenice, Akihiko Yokoyama, Zhichao Yuan, and Xingmi Zheng. Javier Chang, Monica Devi, Olga Tamara Maria Lefebvre, and Srujana Sammeta were responsible for word processing.
Gemma Rose Diaz from the Communications Department led the editorial team and managed the report’s production with editorial assistance from David Einhorn, Harold Medina (and team), Lucy Scott Morales, Nancy Morrison, Grauel Group, and TalentMEDIA Services.
This issue of the GFSR draws in part on a series of discussions with banks, securities firms, asset management companies, hedge funds, standard setters, financial consultants, pension funds, trade associations, central banks, national treasuries, and academic researchers.
This GFSR reflects information available as of April 7, 2022. The report benefited from comments and suggestions from staff in other IMF departments, as well as from Executive Directors following their discussions of the GFSR on April 11, 2022. However, the analysis and policy considerations are those of the contributing staff and should not be attributed to the IMF, its Executive Directors, or their national authorities.
Foreword
The backdrop of this Global Financial Stability Report is a challenging one. Rising risks to the inflation outlook and rapidly changing views about the likely pace of monetary policy tightening have been dominant themes affecting financial stability. Juxtaposed against financial stability risks is the Russian invasion of Ukraine, which will exert a material drag on the global recovery and pose significant uncertainties to the outlook. The balance of risks to growth has tilted more firmly to the downside as outlined in the April 2022 World Economic Outlook. These developments have occurred just as the world is slowly bringing the pandemic under control and as the global economy continues to recover from COVID-19.
The sharp rise in commodity prices—in concert with more prolonged supply disruptions—have exacerbated preexisting inflation pressures and led to a significant rise in inflation expectations. Central banks face heightened challenges in credibly bringing inflation to target while safeguarding economic recovery. They will have to navigate a delicate balancing act between removing accommodation at a pace that prevents an unmooring of inflation expectations while avoiding a disorderly tightening of financial conditions that could interact with financial vulnerabilities and weigh on growth.
Financial stability risks have risen along several dimensions and the resilience of the global financial system may be tested. A sudden repricing of risk from an intensification of the war may expose, and interact with, some of the vulnerabilities built up during the pandemic, and lead to a sharp decline in asset prices. Potential transmission channels of the war in Ukraine on global financial markets include inflation pressure from commodity price shocks, direct and indirect exposures of banks and nonbank financial intermediaries and firms, disruptions in commodity markets, counterparty risk exposures, poor market liquidity and funding strains, and cyberattacks affecting the resilience of financial market utilities and broader market functioning. While the financial system has proven resilient to recent shocks, future shocks could be more harmful.
Emerging and frontier markets are facing tighter external financial conditions on the back of monetary policy normalization and heightened geopolitical uncertainty, which is increasing downside risks for portfolio flows. Emerging market sovereigns have become more reliant on domestic banks for funding, and bank holdings of domestic sovereign debt have surged to historic highs. Distress in emerging markets could trigger an adverse feedback loop between sovereigns and banks through multiple channels—the sovereign-bank nexus— potentially reducing bank soundness and lending to the economy. In China, the ongoing stress in the real estate sector and the increase in COVID cases has raised concerns about a growth slowdown, with potential feedback effects and possible spillovers to other emerging markets.
Policymakers will need to confront these challenges by taking decisive actions to address financial vulnerabilities and rein in rising inflation. To manage the delicate balance between containing inflation and supporting the recovery from the pandemic, interest rates might have to rise beyond what is currently priced in markets to get inflation back to target in a timely manner. For many countries, this may entail pushing interest rates well above their neutral level.
While taking relevant steps to address energy security concerns, policymakers should intensify their efforts to implement the COP26 roadmap. Although notable progress has been made to strengthen the climate information architecture in terms of disclosure standards and bridging data gaps, focused policies aimed at scaling up private finance in the transition to a greener economy remain a major imperative.
The war in Ukraine has also brought to the fore a number of medium-term structural issues policymakers will need to confront in coming years. The geopolitics of energy security may put climate transition at risk. Capital markets might become more fragmented, with possible implications for the role of the US dollar. And the fragmentation of payment systems could be associated with the rise of central bank digital currency blocs. In addition, more widespread use of crypto assets in emerging markets could undermine domestic policy objectives. Multilateral cooperation will remain key to overcome these medium-term challenges.
Tobias Adrian Financial Counsellor