The global financial safety net has become increasingly fragmented, making it harder to respond to crises in a world roiled by volatile capital flows, International Monetary Fund staffers warned.

Defenses haven’t kept up with the growth of external debt in recent years, the Washington-based fund said in a report released Thursday. As a result, a system-wide shock could overwhelm the world’s crisis resources, which include nations’ foreign-exchange reserves, central-bank swap lines, regional funds such as the euro area’s European Stability Mechanism, and the IMF itself, the lender said.

Financial cycles have been “growing in amplitude and duration, capital flows have become more volatile, and non-banks have gained importance, altering the nature of systemic risk,” IMF staff said in the report, which was presented to the fund’s executive board on March 7. In a major event, “the needs could exceed the collective resources available,” the fund said.

The paper takes stock of the global monetary system that has prevailed since 1973, the year that marked the collapse of the Bretton Woods system of exchange rates pegged to the dollar. At a meeting in Shanghai last month, Group of 20 finance ministers and central bankers said the IMF’s work would inform the group’s study of the “evolution” of the world’s financial architecture.

The current monetary system, with the freedom it offers to countries to choose their exchange-rate strategy, has proven more flexible in responding to shocks, the IMF said.

Exposed Weaknesses

But the 2008 crisis exposed the system’s weaknesses, including a lack of financial oversight. Since then, the global economy has continued to undergo major structural shifts that are having a significant effect on the international monetary landscape, the IMF said.

The growth of emerging-market and developing countries has made the global economy more “multipolar,” fund staff said. Still, financial markets in such nations aren’t as deep as in advanced economies, and the system remains highly dependent on the dollar as a reserve currency.

The central role of one or two reserve currencies can have significant spillover effects on other countries, especially those with open economies and less developed financial markets, the IMF said.

At the same time, the globalization of finance has led to a dramatic increase in capital flows. “Periodic episodes of high capital flow volatility appear to have become a feature of the new global landscape,” putting pressure on emerging markets in particular, the IMF said.

Meanwhile, non-banks such as insurers and mutual funds have grown in importance as creditors, creating new risks, according to the fund.

The IMF said reforms should focus on bolstering the resilience of emerging markets to large capital flows, as well as improving global cooperation on stability issues, with countries paying more attention to how their policies affect the world.

IMF staff said the fund could play a role in monitoring a “large enough and more coherent” global safety net. The IMF is assessing whether it has adequate resources to fulfill its central role in the global system, according to the report.