In its latest Global Financial Stability report, the International Monetary Finance (IMF) highlights the key risks including “shockwaves from the war in the Ukraine” and a dangerous mix of inflation, debt, and monetary policies.
The report notes that the repercussions of the war and ensuing sanctions continue to reverberate. This is reflected in the volatility of stock markets since the invasion in February.
Last Friday, the
Cboe Volatility Index (.VIX), known as Wall Street’s fear gauge, recorded its largest one-day gain in about five months to close at a five-week high of 28.21.
“The resilience of the global financial system will be tested through various potential amplification channels,” according to the report.
It said these include the exposures of financial institutions to Russian and Ukrainian assets; market liquidity and funding strains; and the acceleration of cryptoisation—residents opting to use crypto assets instead of the local currency—in emerging markets.
The report pointed out that Europe is more vulnerable than other regions due to its geographic proximity to the war, reliance on Russian energy, and the non-negligible exposure of some banks and other financial institutions to Russian financial assets and markets.
In addition, ongoing volatility in commodity prices may severely pressure commodity financing and derivatives markets and could even cause more disruptions like the wild swings that halted some nickel trading last month. “Such episodes, amid heightened geopolitical uncertainty, may weigh on liquidity and funding conditions,” it added.
More broadly, the IMF sees growing risks to stability in decentralised finance (DeFi). These platforms consist of “smart contracts” that are essentially software code setting the conditions for a transaction.
They are entirely automated and do not rely on centralised entities for market making, liquidity, settlement, or custody services.
DeFi has surged with more than $215 billion in “value locked” on the platforms, up from less than $1bn two years ago, according to the site DeFi Llama.
One of the key issues is that “DeFi often involves the build-up of leverage, and is particularly vulnerable to market, liquidity, and cyber risks,” the IMF says.
©Markets Media Europe 2022
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