The International Monetary Fund (IMF) has said that rising geopolitical tensions among major economies have intensified concerns about global economic and financial fragmentation, which could have potentially important implications for global financial stability.
The IMF said fragmentation induced by geopolitical tensions could affect the cross-border allocation of capital, international payment systems, and asset prices.
This could pose macro-financial stability risks by increasing banks’ funding costs, reducing their profitability, and lowering the provision of credit to the private sector. Greater financial fragmentation could also exacerbate capital flow and macro-financial volatility by limiting international risk diversification, the Fund said in an article titled “Geopolitics and Financial Fragmentation: Implications for Macro-Financial Stability.”
Policymakers need to be aware of potential financial stability risks associated with a rise in geopolitical tensions and assess and quantify geopolitical shock transmission to financial institutions.
Financial institutions may need to hold adequate capital and liquidity buffers against rising geopolitical risks.
The global financial safety net also needs to be buttressed through adequate levels of international reserves held by countries, central bank liquidity swap arrangements, and precautionary credit lines from international financial institutions.
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