Ukrainian Conflict to Test Resilience of Global Financial System: IMF

Washington — Russia’s invasion of Ukraine poses a risk of financial stability “in some ways” and will test the resilience of the global financial system when interest rates are rising sharply, the International Monetary Fund (IMF) is a year Two global financial warnings on Tuesday’s stability report.

There have been no systematic financial events globally so far, but the IMF warned that there are several channels in which the Ukrainian turmoil could be amplified system-wide.

These include direct and indirect exposures of banks and non-banks to Russia. Commodity market turmoil and increased counterparty risk. Poor market liquidity and funding tensions. Accelerating cyber attacks and the use of crypto assets, he said.

“The financial system has proven resilient to recent shocks, but future shocks can be more harmful,” the IMF said.

“Abrupt price revisions to the risks resulting from the intensification of war and the resulting escalation of sanctions could expose and interact with some of the vulnerabilities accumulated during the pandemic, leading to a sharp drop in asset prices. there is.”

The exposure of global banks to Russia and Ukraine is relatively modest and limited to a small number of European lenders. However, it is unclear how indirect exposure financial companies have in disputes due to incomplete and inconsistent disclosures.

Indirect exposures from activities such as investment banking, wealth management, off-balance sheet supply chains and commodity finance, derivatives and contingent liabilities “surprise investors when revealed and sharp counterparty risk. It may lead to a rise. ” According to the report.

Derivatives are one of the concerns, said Tobias Adrian, director of the IMF’s Monetary Fund’s Monetary Capital Markets Division, which publishes the report.

“They are so opaque that it’s hard to know how much hidden leverage they have,” Adrian said. The report flagged foreign exchange swaps and forward transactions as one area that could leave banks unhedged if transactions had to be cancelled.

“Other concerns are private markets, private debt, and private equity. There may be invisible exposure.”

The market is already upset by widespread western sanctions that have reduced funding and pushed up prices for many key commodities, including oil.

The report also said that a handful of dealer banks offering commodity lending could cause commodities market turmoil.

Adrian said that approximately five commodity exchanges and five dealer banks dominate the market, creating a concentration risk. “We are a little worried about the commodity market,” he added.

Pete Schroeder and Michelle Price