While the tug of war between the two biggest economy planets, with Washington impose restrictions on Chinese industry and Beijing respond to inquiries to Micron Technologies, its partners and executives IMF express concern about the risks associated with financial stability from escalating tensions and a looming decoupling of the two largest economies.

Therefore, they urge supervisors, regulators and financial institutions to be aware of the risks associated with financial stability. geopolitical tensionsunderstand and record their impact on lending, interest rates, the market, liquidity and business activity in order to control and avoid a major crisis due to geopolitical risks.

These economists point out that the separation of economies as a result of restrictions on both sides has serious implications for global financial stability, as it affects not only cross-border investment, but also international payment systems and asset prices.

They specifically emphasize that investment funds are particularly sensitive to geopolitical tensions, which often lead to an outflow of capital, including direct investment. The inevitable consequence is the erosion of financial stability as the cost of financing banks rises, their profitability declines and, ultimately, credit to the private sector is restricted.

At the same time, escalating tensions could increase banks’ debt risks and their borrowing costs. This could also lead to an increase in government bond yields, which will lead to a decrease in the value of securities in banks’ portfolios and, thus, to a further increase in their cost of funding.

However, at the same time, as IMF economists note, geopolitical tensions are transmitted to the banking system through the real economy. The emergence of gaps in supply chains and commodity markets has an immediate impact on economic growth and inflation, and can exacerbate banks’ losses on both credit and the market.

In this case, their profitability will be further limited, and their capitalization will be compressed. The resulting pressure will inevitably significantly reduce the ability of banks to take on risk, forcing them to reduce lending, with obvious consequences for economic growth.

The Fund’s economists emphasize that the separation of economies affects cross-border investment, international payment systems and asset prices.

Therefore, they call on all countries that depend on external financing to ensure the adequacy of foreign exchange reserves and the required liquidity of the “cushions” in their financial institutions.

They also recommend that political leaders be ready for crises and strengthen the mechanisms by which they can deal with situations of instability in the financial system due to geopolitical tensions. They also highlight the need to strengthen the global financial system safety net, that is, the network of financial systems and mechanisms that act as a hedge against crises and the financial measures that mitigate the effects of these crises. And they emphasize that international supervisory and regulatory bodies, such as the Financial Stability Board and the Basel Committee on Banking Supervision, must continue to promote common rules and standards for the financial system to prevent fragmentation.

As they highlight in their related study published on the IMF blog, an escalating confrontation between the investor country and the recipient country, similar to that between the US and China since 2016, reduces the overall bilateral cross-conflict. cross-border portfolio investment by about 15%.

The relevant IMF report released yesterday notes that the decoupling of the world’s two largest economies “is likely to become a channel through which the fronts of geopolitical interests will develop at the global level.”

The fund directly refers to a call made last year by US Treasury Secretary Janet Yellen to US businesses to turn to friendly supply chains rather than depend on countries with strained relations with the US. He also recalls that in Europe the French government has demanded a relaxation of the rules governing state aid in the EU. develop “Made in Europe” and respond to US IRA program subsidies.

Therefore, the Fund believes that the direction of cross-border capital flows will soon change, and stresses in particular that the US microprocessor bill and the corresponding movement in Europe will affect the production of multinational companies and the strategies with which they ensure their supply and will lead to changes in networks supply chains. He acknowledges that these changes will potentially bolster homeland security and possibly help the US maintain its technological lead. But given that most countries are leaning in favor of domestic procurement, in most cases, switching to suppliers from friendly countries will limit choice and make all countries more vulnerable to macroeconomic shocks.