Global near-term financial stability risks remain contained, but vulnerabilities are mounting in the long term

According to the International Monetary Fund (IMF) in its latest Global Financial Stability Report from October 2024, near-term financial stability risks remain contained although uncertainty is elevated, and vulnerabilities are mounting in an environment of widening disconnection between elevated economic and geopolitical uncertainty and low financial volatility. In this occasion the report provides an analysis of the advances in Artificial Intelligence and its implications for Capital Market Activities.

Main findings of the report:

• Near-term financial stability risks remain contained although uncertainty is elevated, and vulnerabilities are mounting rising risks in the future: Global economic activity has moderated, and inflation has continued to slow. Near-term financial stability risks remain contained although uncertainty is elevated, and vulnerabilities are mounting regarding: High assets valuations, the global rise in private and government debt and increased use of leverage by nonbank financial institutions (NBFIs).
  
  
• Economic and geopolitical uncertainty: related with the uncertainty about future policies of newly elected governments in a year of multiple elections across the world, and with the evolution of the ongoing military conflicts. In this regard, the IMF highlights the widening disconnect between uncertainty and market volatility which could increase the chance of sudden surges in volatility and sharp asset repricing if an adverse shock occurs, which could be amplified by the vulnerabilities.
  
  
• The global banking sector has remained resilient, with ample capital and liquidity buffers. Although nonperforming loan ratios have increased for some forms of lending, such as consumer credit cards, automobile loans, and CRE, overall asset quality has not deteriorated significantly. However, net interest margin and bank profitability could be negatively impacted by interest rate cuts among major central banks.
  
  
• AI and machine learning opportunities and risks in capital markets. Adopting these new technologies may bring efficiencies and cost savings to both banks and NBFIs, the latter are generally more agile and subject to fewer constraints in using AI. However, widespread adoption could also worsen financial fragilities in the future, through potentially higher volatility during market stress, more opacity or reliance on a few key AI service providers.