Lending Into Fragility: Key Risks From the IMF’s Global Financial Stability Report
For lenders navigating deteriorating credit conditions, the IMF’s latest Global Financial Stability Report (GFSR) delivers a sobering message: financial vulnerabilities are deepening, and the margin for error is shrinking.
At Wiserfunding, we’ve analyzed the IMF’s findings alongside proprietary risk data to identify the most pressing threats—and the strategies lenders can deploy to stay ahead.
Three Critical Risks for Lenders
The IMF’s April 2025 report highlights three key vulnerabilities in the global financial system that lenders must monitor closely:
Further Asset Repricing
Valuations across major asset classes—such as US and global tech equities and high-yield bonds—still exceed long-term norms. The latest data confirms that this overvaluation persists, leaving markets vulnerable to sudden corrections. Such repricing could directly impact borrowing conditions, especially for firms at the lower end of the credit spectrum. Lenders should recalibrate credit exposure and pricing strategies to reflect the true risk of underlying assets.
Source: IMF
Strains in Leveraged Financial Institutions
US bank credit to nonbank financial intermediaries (NBFIs) has surged, reaching over 119% of CET1 capital in 2024, up from 62% in 2014. Additionally, hedge fund borrowing has tripled since 2014. These exposures significantly raise the risk of systemic contagion during a deleveraging event triggered by margin calls or liquidity shocks. Lenders should carefully assess counterparty risks, especially with institutions heavily reliant on leverage.
US Bank Credit Issued to Nonbank Financial Intermediaries (Percent of term loans and commitments and shareholders’ equity)
Source: IMF, April 2025
Debt Sustainability in Sovereign Bond Markets
Public debt-to-GDP projections are nearing 95%, with yields on government bonds rising sharply. Emerging markets are under the most pressure, with refinancing costs at decade highs. Sovereign fragility is a key concern for lenders, especially in cross-border portfolios. Exposure to countries with high debt levels and weak fiscal positions could result in credit losses and capital flight. Lenders should monitor sovereign debt levels and refinancing schedules closely.
Sourse: cbo.gov, March 2025
Geopolitical Shocks: An Overlooked Trigger
Geopolitical risk, as highlighted by the IMF, is a major disruptor of asset prices, especially in emerging markets. On average, stock returns drop over 2% during geopolitical events, and sovereign CDS spreads rise in countries with weak fiscal buffers. For lenders, this reinforces the importance of incorporating geopolitical risk analysis into credit decisions, particularly in politically sensitive or export-reliant regions.
Integrating geopolitical risk into credit models provides a critical advantage, helping lenders better assess the potential for market shocks. Understanding both financial and political landscapes leads to more informed lending decisions.
Source: IMF, April 2025
Market Functioning: Orderly—for Now
Despite the VIX soaring from under 20 to over 40, core markets have remained liquid. Central-bank swap lines and robust dealer inventories prevented the funding-market freezes seen in 2008 and early 2020. Yet, as quantitative tightening continues, dealer capacity may come under strain.
During the April volatility spike, bid-ask spreads on 10-year Treasuries widened by a modest 3 basis points—far less than the 15-point spike in March 2020. This suggests resilience but also points to a potentially limited buffer if volatility intensifies further.
Swap Rates Minus Treasury Bond Yields
Source: IMF, April 2025
A System Under Pressure—But Not Without Strategy
In a world of elevated financial fragility, the greatest asset lenders can hold isn’t liquidity—it’s clarity. The April 2025 Global Financial Stability Report leaves little doubt: cracks are forming in multiple parts of the financial system. But with timely insight and proactive strategies, lenders can avoid being caught off guard—and instead, use this period to improve risk selection.
📈 At Wiserfunding, we equip lenders with the tools they need to navigate this uncertain environment. Talk to our experts to prepare for the risks and opportunities ahead: https://wiserfunding.com/contact-us/
References:
https://www.imf.org/en/News/Articles/2025/04/22/tr-04222024-gfsr-press-briefing
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