Chapter 1 analyzes new data and highlights a divergence in the resilience and stability of financial sectors in emerging market and developing economies (EMDEs). An analysis of 50 EMDEs, which represent 93 percent of total bank assets in EMDEs, found that 30 percent of these countries face high financial-sector risks in the next 12 months. The majority do not have an adequate policy framework and the institutional capacity to deal with financial stability challenges. The report details measures that banking authorities in these countries can take to fortify vulnerable financial sectors.

Chapter 2 calls attention to the excessive holdings of government debt by domestic banks in emerging market and developing economies (EMDEs) – an Achilles heel for some economies – particularly those with weaker macroeconomic policies, facing public debt sustainability challenges. Between 2012 and 2023, the exposure of EMDE banks to government debt surged by over 35 percent. While banking authorities cannot resolve sovereign-bank nexus risks alone, they should take steps to foster more prudent risk-taking by banks and strengthen financial sector resilience.

Chapter 3 looks at how emerging market and developing economies (EMDEs) can enable more climate finance without compromising on the important goals of financial sector stability and inclusion for underserved people. EMDEs face substantial financing gaps in low-carbon, climate-resilient investments. EMDE banks have the potential to play a larger role in closing the EMDE climate financing gap. In almost 60 percent of banks in EMDEs, lending for climate-related investment accounts for less than 5 percent of their overall portfolios, and more than one-quarter offer no climate financing at all.