International Monetary Fund (IMF) on Wednesday warned that rising financial vulnerabilities could derail the long-waited global recovery despite that the financial stability continues to improve.
"The global financial system continues to strengthen in response to extraordinary policy support, regulatory enhancements, and the cyclical upturn in growth," said the IMF in its Global Financial Stability Report on Wednesday.
"But beyond these recent improvements, the environment of continuing monetary accommodation-necessary to support activity and boost inflation-is also leading to rising asset valuations and higher leverage," the Washington-based lender warned.
The continued easy monetary and financial conditions are fueling investors' risk appetite, and broadening their search for yield, said the IMF. As the search for yield is intensified, market risks are shifting from banking sector to non-banking sector, it added.
In addition to the intensified search for yield, major economies are seeing their debt levels build up.
According to the report, in G20 economies, debt held by non-financial institutions, such as governments, households and companies, now exceeded 135 trillion U.S. dollars, equivalent to about 235 percent of their combined GDP.
IMF warned that risks, such as surge in inflation and a sudden jump in interest rates, could trigger market turbulence, which could lead investors exposing to bigger losses.
"The key challenge confronting policymakers is to ensure that the buildup of financial vulnerabilities is contained while monetary policy remains supportive of the global recovery," said the IMF.
It suggested that major central banks thoroughly explain their plans to unwind monetary accommodation in order to avoid creating market turbulence.
Financial regulators should employ macro-prudential policies to curb rising leverage and contain financial stability risks, said the IMF.