The global financial system faces elevated stability risks due to tight financial conditions and an uncertain economic outlook, according to a new report from the Financial Stability Board (FSB).

In its latest annual report, delivered ahead of a meeting of G20 finance minsters and central bank governors in Marrakesh, the global policy group warned that vulnerabilities in the global financial system remain heightened in the current environment.

“The cost of financing has risen substantially, at a time when debt is at very high levels across the government, corporate and household sectors. High interest rates and an uncertain growth outlook also create the potential for higher volatility in asset prices,” it said.

Intensified volatility “could generate significant spikes in collateral and margin calls, inducing fire sales of assets,” it warned. “Liquidity mismatches in non-bank financial entities could also amplify shocks if they lead to simultaneous asset sales across markets.”

At the same time, the high-rate, high-debt environment “is likely to lead to credit quality challenges that may affect both banks and non-bank investors,” it said.

In the report, the FSB also outlined its ongoing work to address some of these weaknesses, including its work to enhance resilience in the shadow banking sector, improve the resolvability of central counterparties and ease cross-border payments.

Yet progress on implementing the G20 financial regulatory reforms developed in the wake of the global financial crisis “remains uneven,” it said.

Among other things, FSB noted that the adoption of the final Basel III reforms has been pushed to 2024 or later in certain jurisdictions. It also said addressing gaps in resolution planning for banks remains a work in progress, as do the efforts to implement resolution regimes for insurers and central counterparties.

Moreover, reforms to the shadow banking sector continue to move “at a slow pace” and remain “at an earlier stage than other reform areas,” it said.

Additionally, the turmoil that arose in the global banking sector earlier this year, which resulted in the failure of several banks, has revealed some new areas for the FSB to tackle, the report said.

“A striking feature of the bank failures was the unprecedented speed and scale of deposit runs,” it said. “The FSB is assessing vulnerabilities from asset-liability and liquidity mismatches and exploring whether technology and social media have changed deposit stickiness.”

Alongside these fundamental financial stability concerns, the report stressed that external threats — such as climate change, cybersecurity and the cryptoasset markets — continue to loom as well.

“Exposure to climate-related vulnerabilities is becoming more evident,” the report said — adding that the materialization of physical risks, and the impact of the transition to a low carbon economy “could have destabilizing effects from increases in risk premia and falling asset prices.”

The FSB said it’s also working to address these vulnerabilities, with ongoing efforts to develop global climate reporting standards, its recommendations for a global regulatory framework for cryptoassets, and proposals for greater convergence in cyber incident reporting.

Looking ahead, it said, “authorities need to stay vigilant as a further deterioration in economic conditions may test again the resilience of the global financial system.”

The combination of higher inflation, lower growth and tighter financial conditions may crystallize existing financial vulnerabilities or give rise to new ones, the report said.

“The March banking turmoil was a stark reminder of the speed with which vulnerabilities can be exposed in the current environment,” it said. Moreover, many governments may have less capacity to intervene in the face of negative shocks, given the effects of tighter financial conditions on their own balance sheets.