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International Monetary Fund (IMF) recently indicated that persistently high central bank interest rates could pose threats to global banks. 5% would be particularly susceptible to stress. A troubling 30% would be at risk if the world faces a scenario of "stagflation" – a combination of low growth and high inflation.
The IMF's warnings were based on a new global stress test, applied to about 900 banks in 29 countries. This assessment was driven by significant financial events, including the collapse of several banks, such as California's Silicon Valley Bank and Switzerland's Credit Suisse Group. Tobias Adrian, managing director of the IMF's Monetary and Capital Markets Department, highlighted the existence of a "weak tail of banks" in several countries. The revised stress test model evaluated the impact of persistently high interest rates and the possible sudden withdrawal of consumer deposits. The findings showed that 5% of banks could have capital shortfalls under the baseline model, which could be as high as 30% or even more under severe stress.
While the IMF did not specifically indicate which banks are likely to experience problems under these economic conditions, it is clear that both prominent global institutions and smaller banks are at risk. Adrian pointed out that even the failure of smaller banks can jeopardize financial stability, referring to the recent banking crisis in the U.S.
The organization emphasized the importance of rigorous banking supervision. There is an urgent need for government intervention in their banking sector. Banks also need to proactively strengthen their resilience by increasing their capital levels. These warnings and recommendations were presented at the annual meetings of the IMF and the World Bank in Marrakech, Morocco.
Adrian commented on the stability of government bond markets and highlighted the rapid but orderly rise in yields. The U.S. Federal Reserve's decision to raise interest rates in 2022 and 2023 had a significant impact on regional U.S. banks and led to a series of bank failures earlier this year. However, the U.S. central bank has forecast additional hikes to combat inflation.
Based on the IMF's stress test parameters, banks that saw a decline in their capital levels of more than five percentage points, or fell below a 7% threshold, were considered "weak". Under the standard scenario, 55 banks (with 4% of global assets) were classified as weak. This number rose to 215 banks, representing a staggering 42% of global assets, in a stagflation situation. The report concluded by advising central banks to maintain high rates until inflation stabilizes, but also warned against prematurely easing monetary policy.
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Source: Reuters
