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‘There might be exposures that we do not see’
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WASHINGTON — Russia’s invasion of Ukraine has pushed up monetary stability dangers “on a number of fronts” and can take a look at the resilience of the worldwide monetary system at a time when rates of interest are rising sharply, the Worldwide Financial Fund (IMF) warned in its biannual International Monetary Stability Report on Tuesday.
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Whereas there has to this point been no globally systemic monetary occasion, there are a number of channels by which the Ukrainian turmoil might be amplified throughout the system, the IMF warned.
These embrace banks’ and non-banks’ direct and oblique exposures to Russia; commodity market disruptions and elevated counterparty threat; poor market liquidity and funding strains; cyberattacks and the acceleration of crypto asset use, it mentioned.
“Whereas the monetary system has confirmed resilient to latest shocks, future shocks might be extra dangerous,” the IMF mentioned.
“A sudden repricing of threat ensuing from an intensification of the conflict and the related escalation of sanctions might expose, and work together with, a number of the vulnerabilities constructed up through the pandemic, resulting in a pointy decline in asset costs.”
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International banks’ publicity to Russia and Ukraine is comparatively modest and restricted to a handful of European lenders. Nonetheless, it’s unclear how a lot oblique publicity monetary firms should the battle as a result of disclosures are patchy and inconsistent. Oblique exposures from actions similar to funding banking and wealth administration, off-balance-sheet provide chain or commodity financing, derivatives, and contingent liabilities, might be “significant and shock buyers when revealed, resulting in a pointy rise in counterparty threat,” the report mentioned.
Derivatives is one space of concern, mentioned Tobias Adrian, Director of the IMF’s Financial and Capital Markets Division, which publishes the report.
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“They’re very opaque and it’s troublesome to know to what extent there’s any hidden leverage,” mentioned Adrian. The report flagged international trade swaps and ahead contracts as one space that might go away banks unhedged if trades should be canceled.
“The opposite concern are personal markets, personal debt, personal fairness. There might be exposures that we don’t see.”
The market is already reeling from intensive Western sanctions which have decreased financing and pushed up the worth of many main commodities together with oil.
The report additionally mentioned the handful of vendor banks that present commodities financing had the potential to create commodity market disruptions.
Adrian famous that roughly 5 commodity buying and selling homes and 5 vendor banks dominate the market, creating focus threat. “We do fear considerably about commodity markets,” he added.
© Thomson Reuters 2022
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