By Stefania Spezzati and Elisa Martinuzzi<\/p>\n
LONDON (Reuters) -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.<\/p>\n
\u201cAlthough 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,\u201d the IMF said in one of the chapters of its semi-annual Global Financial Stability Report.<\/p>\n
\u201cEnhancing FX liquidity stress tests is essential to assess the sectoral resilience to funding shocks,\u201d according to the IMF.<\/p>\n
DERIVATIVES ADD TO VULNERABILITY<\/p>\n
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 \u201cmay also raise the global FX market\u2019s vulnerability to adverse shocks,\u201d the IMF said.<\/p>\n
Stress in the FX market \u201ccan spill over to other asset classes, tightening financial conditions and posing risks to macro financial stability\u2014especially in countries with significant currency mismatches and fiscal vulnerabilities,\u201d the IMF added.<\/p>\n
Reuters 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\u2019s policies are eroding trust in the U.S. as bedrock of financial stability.<\/p>\n
\u201cA shifting global macro financial landscape underscores the need to strengthen FX market resilience,\u201d 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.<\/p>\n
Supervisors and banks should effectively monitor and manage liquidity risks in significant currencies, it added.<\/p>\n
STRENGTHENING SWAP LINES<\/p>\n
The Federal Reserve has lending facilities with other central banks to alleviate shortages of dollars and to keep financial stress from spilling over into the United States.<\/p>\n
But European central banking and supervisory officials for months have been questioning whether they can still rely on the Fed, Reuters\u00a0has previously reported.<\/p>\n
For the IMF, \u201cstrengthening and expanding the network of central bank swap lines can enhance global FX liquidity backstops and help reduce contagion risks\u201d.<\/p>\n
\u201cPolicy backstops are critical for stabilizing the global FX market during adverse shocks. Among the most effective tools are the Federal Reserve\u2019s US dollar liquidity swap lines.\u201d<\/p>\n
The IMF also highlighted that \u201cinternational reserves are a stabilizing force during stress episodes\u201d as they can be used when private funding dries up.<\/p>\n
(Reporting by Stefania Spezzati, Editing by Nick Zieminski)<\/p>\n","protected":false},"excerpt":{"rendered":"By Stefania Spezzati and Elisa Martinuzzi LONDON (Reuters) -Financial institutions that dominate the $9.6 trillion currency market should…\n","protected":false},"author":2,"featured_media":59515,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[114,85,46,190],"class_list":["post-59514","post","type-post","status-publish","format-standard","has-post-thumbnail","category-markets","tag-business","tag-il","tag-israel","tag-markets"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/59514","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=59514"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/59514\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/59515"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=59514"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=59514"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=59514"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}