Is a financial crisis in the offing?

Contrary to IMF's view, the real risk lies in the rollback of bank regulations in the US, not shadow banking

- T. RAM MOHAN

America's President Donald Trump has unleashed a tariff war that will most certainly slow down global economic growth in 2025. The world can live with slower growth. The worrying prospect is that slow growth combines with turbulence in the financial markets to cause a financial crisis.

Is such a crisis in the offing? In recent weeks, three entities have raised the possibility of a financial crisis—though none is forecasting one. The International Monetary Fund (IMF) flags it in its Global Financial Stability Report (GSFR), April 2025. The Economist, in a special report dated May 31, speculates about where the next financial crisis could originate.

Moody's Analytics talks about it in a study published this month.

The IMF and The Economist believe that the likeliest source of the next financial crisis will be from outside the banking system. Moody's Analytics thinks that entities outside the banking system will worsen any systemic shocks that arise.

Financial crises cause greater loss of economic output than macroeconomic crises. They are also more difficult to get out of. On average, it takes eight years to come out of one, according to Kenneth Rogoff and Carmen Reinhart, two economists who have studied financial crises in great detail.

The IMF worries about US banks' exposure to non-bank financial institutions (NBFIs), up from 6 per cent of total bank loans and commitments in 2010 to about 16 per cent in 2024. NBFIs are a very broad category. These include not just financing companies, but also investment funds such as mutual funds, hedge funds, private equity, and credit funds. It's not clear why that should cause concern. US bank exposure to NBFIs seems extremely diversified. It should be a source of comfort, not concern.