by Pete Schroeder and Michelle Price
WASHINGTON (Reuters) – Russia’s invasion of Ukraine is heightening risks to global financial stability and testing the resilience of the financial system as interest rates rise, warned the International Monetary Fund (IMF) on Tuesday.
While the war in Ukraine has so far not caused any systemic global financial shocks, the turmoil it has unleashed is likely to escalate through different channels, says the IMF in its latest Report on global financial stability, a half-yearly exercise.
Among the possible propagation channels, specifies the organization, are the direct and indirect exposure to Russia of banks and non-banking institutions, disruptions in the commodity markets, increased counterparty risk, lack of liquidity. and financing difficulties in certain markets or even cyberattacks and the increased use of crypto-assets.
“While the financial system has proven resilient to recent shocks, future shocks could be more painful,” the IMF said.
“A sudden reassessment of risk related to an escalation of the war and consequent escalation of sanctions could expose some of the weaknesses accumulated during the pandemic and interact with them to lead to a sharp drop in asset prices”, details- he.
Global banks’ exposure to Russia and Ukraine is relatively low and confined to a small group of European institutions, but the indirect exposure of the financial sector is more difficult to assess.
Indirect exposure related to activities such as investment banking, wealth management, off-balance sheet financing, commodity market financing or financial derivatives could therefore “surprise investors once revealed, which would lead to a sharp increase in counterparty risk,” the report said.
For Tobias Adrian, director of the IMF’s monetary and capital markets department, derivatives are one of the main sources of concern.
“They’re very opaque and it’s hard to measure the amount of hidden leverage,” he said. The report mentions, among other things, the case of currency swaps and forward contracts, which could expose banks to losses in the event of the cancellation of unhedged transactions.
“The other area of concern is private markets, private debt, private equity. There may be exposures that we don’t see,” Tobias Adrian added.
The report also mentions the risk that the few banks specializing in the financing of commodities markets will cause disruption, a risk amplified by the fact that half a dozen large trading companies and as many banks dominate this market, which which creates concentration risk.
“We are somewhat concerned about commodity markets,” Tobias Adrian said.
(Report Pete Schroeder and Michelle Price, French version Marc Angrand)