IMF warns banks and supervisors of liquidity risks in $9.6 trillion FX market.
Financial institutions that dominate the $9.6 trillion currency market should hold the necessary liquidity and capital buffers and run enhanced stress tests to prevent disruptions to the financial system, according to an International Monetary Fund report released on Tuesday.
“Although stress testing and systemic risk monitoring have advanced, the role of FX markets as a conduit for risk transmission and cross-border spillovers remains underappreciated,” the IMF said in one of the chapters of its semi-annual Global Financial Stability Report.
Global banks have significant dollar exposure in their balance sheets, making them vulnerable to potential funding shocks. The increasing involvement of non-bank financial institutions and growing trade in derivatives “may also raise the global FX market’s vulnerability to adverse shocks,” the IMF said.
Stress in the FX market “can spill over to other asset classes, tightening financial conditions and posing risks to macro financial stability—especially in countries with significant currency mismatches and fiscal vulnerabilities,” the IMF added.
It was reported earlier this year that European and U.K. regulators have asked banks to monitor and stress test their resilience to U.S. dollar shocks, in the latest sign of how the Trump administration’s policies are eroding trust in the U.S. as bedrock of financial stability.
“A shifting global macro financial landscape underscores the need to strengthen FX market resilience,” the IMF said on Tuesday, noting that following the US tariff announcements in early April 2025, investors in some countries have reduced their US dollar holdings.
Source: Reuters
