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FRM Part II · FRM Exam Part II

Geopolitical Risk in the IMF GFSR April 2025, Chapter 2

Chapter 2 of the IMF Global Financial Stability Report, April 2025, studies how geopolitical risk affects financial stability. It covers how the risk is measured, how it moves asset prices, how it reaches banks and other institutions, how investors react, and what policy can do. For the exam, link each cause to its channel and its policy response.

What this chapter covers

This chapter is one of the 2026 Current Issues readings in FRM Part II. It asks how geopolitical tension, such as conflict, sanctions, terrorism and trade disputes, becomes a financial stability problem. It starts with measurement, including text-based indices of geopolitical risk, and then follows the effect through asset prices, financial institutions and investor flows.

The chapter is built as a chain. First you measure the risk. Then you see how markets price it. Then you see how losses and funding strains reach banks, insurers and nonbank institutions. Then you see how investors shift portfolios and which vulnerabilities amplify shocks. It ends with policy and risk management. If you keep this chain in mind, the details are easier to recall.

It connects directly to the rest of the paper. Market risk covers volatility, tail risk and stress testing. Credit risk covers sovereign and counterparty exposure. Liquidity and treasury risk covers funding runs and collateral stress. Operational risk and resilience covers cyber and third-party disruption. Risk management in investment management covers portfolio positioning. The same chapter ideas can appear as a case question in any of these areas. Check the original IMF text for the exact figures and findings, because questions can test specific conclusions.

Current Issues readings are tested as applied, case-like questions, and this chapter suits that format because it is full of cause-and-effect reasoning. You are rarely asked for a definition alone. You are more likely to be given a scenario, such as a rise in a geopolitical risk index, a sanctions shock or a sudden investor outflow, and asked which channel, vulnerability or policy tool applies. The chapter also reuses ideas you already know from market, credit and liquidity risk, so the effort pays off across the whole paper. It is a manageable reading when you learn it as one connected chain.

Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk): topics in the order to study them

  1. 1Geopolitical Risk Measurement and the GPR IndexStart here because every later finding depends on how geopolitical risk is defined and measured, including its limits.
  2. 2Geopolitical Risk and Asset Price ImpactNext, see how measured risk shows up in prices, volatility and tail outcomes across asset classes and countries.
  3. 3Transmission Channels to Financial InstitutionsThen follow the shock from markets into bank, insurer and nonbank balance sheets, funding and operations.
  4. 4Investor Behavior, Portfolio Flows and VulnerabilitiesThis explains how investor reactions and existing weaknesses can amplify the shock, so it builds on the channels.
  5. 5Policy Implications and Risk ManagementFinish with responses, because policy and risk controls only make sense once you know the risks and amplifiers.

How to prepare Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

Aim to understand the chain from measurement to policy, then test yourself on scenarios. Read the IMF chapter itself at least once, as questions can follow its specific findings.

  1. Read the chapter's key messages and summary first, so you know the main conclusions before the detail.
  2. Write the chain on one page: measure, price impact, institution channels, investor flows, policy. Add two or three key points under each.
  3. For measurement, note what the GPR index captures, how it is built from news text, and what it cannot tell you, such as the exact source or timing of a loss.
  4. For each channel, link it to a known risk type: market, credit, liquidity or operational. Write one scenario per channel.
  5. Separate the shock from the amplifier. Practise saying which vulnerabilities, such as leverage, liquidity mismatch or concentrated exposure, make a given shock worse.
  6. Link policy responses to the risks they address, such as stress testing, capital and liquidity buffers, and supervisory monitoring.
  7. Do scenario-style practice questions and review every wrong answer by naming the channel you missed.

Common mistakes in Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

  • Treating the GPR index as a direct measure of losses.

    Fix: Remember it measures news-based perceived risk. It is an input to analysis, not a loss estimate.

  • Assuming geopolitical shocks affect all assets and countries in the same way.

    Fix: Note that effects differ by asset class, country and starting vulnerability, and look for that difference in the question.

  • Mixing up the shock and the amplifier.

    Fix: Name the trigger first, such as a sanctions event. Then name what worsens it, such as leverage or liquidity mismatch.

  • Forgetting nonbank institutions and focusing only on banks.

    Fix: Include insurers, funds and other nonbanks in each channel you revise.

  • Choosing a policy answer that does not match the risk.

    Fix: Match the tool to the risk: liquidity buffers for funding strain, capital for loss absorption, scenario analysis for unseen exposures.

  • Relying on summaries and ignoring the source text.

    Fix: Read the IMF chapter once and note its specific conclusions, because questions can test them.

Last-day revision: Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

  • Geopolitical risk covers events such as conflict, sanctions, terrorism and trade tension that can disrupt markets and the economy.
  • GPR-type indices are built from counts of news articles on geopolitical tension, so they capture perceived risk.
  • A higher index reading is linked with weaker asset prices and higher volatility, and the effect varies by asset and country.
  • Tail risk matters: geopolitical shocks can widen the left tail of returns more than they move the average.
  • Institutions face the shock through market losses, credit losses, funding and liquidity strain, and operational disruption.
  • Sanctions and cross-border exposures create credit and counterparty risk that is hard to hedge.
  • Investors can cut risk quickly, which drives portfolio outflows and can hurt more vulnerable markets.
  • Leverage, liquidity mismatch and concentration act as amplifiers of the initial shock.
  • Nonbank financial institutions can transmit stress as well as banks.
  • Policy tools include stress testing, adequate capital and liquidity buffers, and close supervisory monitoring.
  • Firms should include geopolitical scenarios in stress tests and review concentrated exposures.
  • Read the question for the channel first, then match the risk type and the response.

Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk) practice questions

Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk): frequently asked questions

Is this chapter part of the FRM Part II syllabus for 2026?

Yes. It is the IMF Global Financial Stability Report, April 2025, Chapter 2, and it is one of the 2026 Current Issues in Financial Markets readings. Always confirm the reading list on the GARP site before you finalise your plan.

How should I study the GPR index for the exam?

Know what it is meant to capture, how it is built from news coverage, and what it can and cannot tell you. Be ready to interpret a rise in the index in a scenario. Do not treat it as a loss number.

Do I need to memorise numbers from the report?

Focus first on the direction of effects, the channels and the policy logic. Read the source for the key findings, and note any figures only if they are central to a conclusion. Questions are applied, so reasoning matters more than raw recall.

How is this chapter tested?

Expect scenario-based multiple-choice questions among the 80 in the exam. You may be asked to identify a transmission channel, a vulnerability or a suitable policy response. Practise linking each scenario to market, credit, liquidity or operational risk.