Emeka Okoroanyanwu
The International Monetary Fund (IMF) has, again, warned that about 5% of banks globally are vulnerable to stress if central bank interest rates remain higher for longer.
This, it said, was despite the easing of crisis in the banking sector in recent months.
It noted also that a further 30 per cent of global banks including some of the world’s largest would be vulnerable if the global economy enters a period of low growth and high inflation, or “stagflation”.
The IMF which is in Marrakech, Morocco, for it’s 2023 Annual General Meetings with the World Bank and other international lenders gave the warning in its semi-annual Global Financial Stability Report just released.
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The warning was based on a new, tougher global stress test that the IMF applied to around 900 banks in 29 countries following the collapse earlier this year of California based Silicon Valley Bank, Switzerland’s Credit Suisse Group and two other U.S. lenders.
Tobias Adrian, director of the IMF’s Monetary and Capital Markets Department, said in an interview conducted last week that “there is a weak tail of banks in many countries.”
IMF has adjusted this year’s stress test to probe the impact of its baseline economic scenario of higher interest rates for longer, as well as the possibility of consumers drying up deposits.
In its “severe-but-plausible” scenario, the IMF envisages the global economy to enter “stagflation. Under the baseline, it’s about 5% of banks that are relatively weak in terms of their capital.
And in severe stress, Adrian noted that the number goes up to 30 per cent or sometimes higher.
The IMF did not identify the banks that could be in trouble if those economic circumstances arose, but they included both small and large ones.
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“There’s certainly some large institutions that could be under pressure in some scenarios, absolutely,” Adrian said, noting the recent U.S. banking crisis which showed how even smaller bank failures could undermine financial stability. Governments, he said, need to aggressively supervise their banks, and examiners must be more intrusive and direct lenders must take more “timely and conclusive” corrective action, the IMF said.
It also said there was an “urgent need” to improve bank resilience by boosting capital levels.
Weak banks, said the IMF are those whose capital levels fell by more than five percentage points over the course of the IMF’s stress test, or below a floor of 7 per cent.
Under its baseline, 55 banks representing 4 per cent of global assets proved weak. Under the stagflation scenario, that number expanded to 215 banks holding 42per cent of assets.
The report urged central banks to stick with higher rates until inflation cools, but warned that some investors appear to be too confident that inflation will fall quickly.