In the shadow of this epic collapse, vast forces are slashing the pillars of the international financial system, setting the stage for the greatest convulsion of instability the world has yet seen in interlinked markets. Hiding behind the latest calm of financials are dangerous imbalances that may cause chains of breakdowns that could affect billions of people and trillions of dollars of assets.
Foreign exchange markets are structurally unprecedentedly exposed
The global financial market has become an expansive network of interlinked risks to global financial stability in times of economic uncertainty, which is the largest and most liquid financial market in the world. Nonbank financial institutions have become much more involved in foreign exchange trading, creating new sources of stress and possible points of failure that may further exacerbate market stress under a crisis scenario.
Flight-to-quality dynamics on macrofinancial uncertainty episodes generate dangerous feedback effects that increase foreign currency funding costs, increase bid-ask spreads, and increase excess exchange rate volatility. They are known to be intensified, especially when coupled with structural weaknesses such as large currency exposures on institutional board sheets and wholesale dealer concentration.
Settlement risk has increased exponentially as volumes of foreign exchange trading grow further, exposing the international financial system to operational risk – from technical faults to highly advanced cyber-attacks. The absence of countervalue and countervalue equivalent in the delivery of currency by any party will generate systemic fragility that may render international trade and financial movement inoperable.
The hidden stability issues are disclosed in the October 2025 report
The IMF Global Financial Stability Report, Shifting Ground beneath the Calm: Stability Challenges amid Changes in Financial Markets, reveals serious vulnerabilities that have emerged below the calm surface. The detailed analysis focuses on the way in which structural changes in financial markets are opening up new opportunities for crisis spillovers.
There is huge inequality in access to sustainable financing for developing economies, with large emerging markets multiplying local currency borrowing and more constrained smaller economies becoming increasingly reliant on short-term, risky financing from domestic banks and central banks. This widening gap is dangerous in widening economic lines when the global shocks are bound to become a reality.
New empirical analysis by IMF economists reveals that countries with stronger local bases have outperformed the others during the last fifteen years in facing global shocks. However, overreliance on very narrow bases of domestic investors (in particular when added to policies of financial repression) gives rise to new classes of systemic risk.
Key Stability Concerns:
- Nonbank financial institution risks
- Currency mismatch vulnerabilities
- Concentrated dealer market activity
- Settlement and operational risks
Policy suggestions aim at infrastructure strengthening in the market
Among the measures that policymakers can employ to alleviate new risks are improved surveillance systems, sufficient buffers in the financial institutions, and the effectiveness of the global financial safety nets, as well as the operational resilience arrangements. Stability depends upon the further development of market infrastructures and on a supply of legal certainty and sound sovereign debt policies.
For example, IMF and World Bank meetings in Washington coincide with rising tensions in trade between China and the US, with President Trump threatening a further 100% tariff on China after their latest export restrictions on critical minerals. These political trends in geopolitics serve as an additional source of uncertainty to the already precarious financial market conditions.
As the IMF’s latest stability assessment shows, underlying rather than above-ground changes in international financial markets are making global financial markets harder and more vulnerable than they appear on the surface situation which urgently needs policy consideration. And, without efforts to tackle these new risks at an international scale, the world financial system faces an existential risk of disruptions embedded with a scale and scope many times those of the last crisis.