IMF: Emerging markets should beware of non-bank capital flow volatility risks

Xinhua News Agency, New York, April 7 — (Reporter Liu Yanan) On April 7, the International Monetary Fund (IMF) released in advance Chapter 2 of the “Global Financial Stability Report.” The chapter highlights that although non-bank financial investment institutions can provide substantial funding to emerging market economies, these institutions are highly sensitive to global risks, and their funding volatility is significantly higher than that of traditional banking institutions, posing challenges to emerging market economies.

Chapter 2 of the “Global Financial Stability Report” typically focuses on structural problems in specific areas or on frontier financial risks, and it is generally published ahead of the full report. The IMF is scheduled to officially release the latest edition of the “Global Financial Stability Report” on the 14th.

The Chapter 2 content released on that day focuses on risks brought by non-bank financial investment institutions. The IMF said that in recent years, as emerging market economies seek external funding, they tend to turn to non-bank channels, but this trend will also bring new financial risks. Especially when global shocks occur, non-bank institutions’ capital volatility is greater, and changes in their investment directions can increase the vulnerability of emerging market economies.

Data show that since the 2008 international financial crisis, investment flowing into emerging markets has grown by 8 times, with a cumulative amount of about $4 trillion, and 80% of the funds are provided by non-bank institutions such as investment funds, hedge funds, pension funds, and insurance companies. Part of the reason is that after the financial crisis, global regulatory reforms restricted the scope for banks to take risks, leading many borrowers to turn to non-bank institutions for financing.

The IMF is concerned that non-bank institutions are extremely sensitive to changes in global risks and can easily suddenly withdraw capital when external conditions change. This will, in a short period of time, intensify external financing pressures on emerging market economies, increase borrowing costs, trigger currency depreciation, and thereby weigh down economic growth. The IMF also noted that, amid the ongoing U.S.-Israel-Iran conflict, some emerging market economies are experiencing capital outflows from non-bank institutions, and the financial risks it brings are worth heightened vigilance.

The IMF recommends that policymakers in emerging market economies, when assessing financial stability risks, need to closely monitor the composition of non-bank institutions’ investments, take measures to mitigate the shocks caused by capital flows, and attract more stable, long-term external investment. (End)