IMF calls for ‘intrusive’ supervision to prevent financial stability risks from ‘sizeable tail of weak banks’
The International Monetary Fund (IMF) has warned that the global banking system remains at risk from the impact of rising rates six months on from Silicon Valley Bank’s (SVB) collapse.
Although the financial system weathered the “acute stress” seen in March this year, the IMF warned in its global financial stability report that “a sizeable tail of weak banks remains”.
The international fiscal watchdog warned that healthy institutions were at risk of contagion from weaker banks, who may face problems thanks to higher interest rates.
Although higher rates can support net interest margins, if rates stay higher for longer, then banks may lose out if they are forced to offer higher rates to attract deposits.
Tighter borrowing costs will also bring about a decline in their credit quality. The IMF said that “the global credit cycle has started to turn as borrower debt repayment capacity diminishes”.
Moreover, if global growth begins to slow then loan demand could fall rapidly, also impacting bank profitability.
To prevent these risks crystallising, the IMF called for “timely, intrusive and conclusive banking supervision”.
“Adequate minimum capital and liquidity requirements across large and small institutions alike are essential to contain financial stability risks,” the IMF said.
It questioned in particular whether existing liquidity rules were stringent enough given the scale of the bank run that felled SVB while it also called for greater supervision of interest rate risk.
The IMF conducted a global stress test to assess the resilience of the global banking system in the face of “severe stagflation”.
Although global banks remained “broadly resilient” under a severe stress, the test uncovered many banks which could face a significant decrease in capital levels through loan losses. Weaker lenders were seen in the US, Europe and China.
Given its size, the IMF highlighted developments in the commercial real estate sector as particularly important for monitoring financial stability.
“Vulnerabilities in the commercial real estate sector pose a significant risk to the financial sector, and it has become more apparent over the course of this year that the sector will face a funding pullback by lenders in the coming years,” it said.