Global Financial Stability Tested by Higher Inflation and Interest Rates

Impact of Financial Fragmentation on Global Financial Stability

Financial fragmentation induced by geopolitical tensions can have significant implications for financial stability. It can affect the cross-border allocation of capital, national payment systems, and asset prices. The smallest increase in geopolitical tensions between investing and recipient countries can lead to a substantial reduction in bilateral cross-border portfolio bank allocations. The recent months have been challenging with persistently high inflation and a couple of bank failures that exposed vulnerabilities. These vulnerabilities, including liquidity, duration, and credit risks, have kept financial stability risks elevated.