- Central banks worldwide might maintain high interest rates longer than usual to combat persistent inflation, a situation that hasn’t been experienced in decades. This new economic environment necessitates that financial supervisors enhance their analytical tools and regulatory responses to manage emerging threats.
- The IMF has improved its stress-testing tools to assess the risks from rising interest rates and the funding pressures that caused some banks to collapse. They introduced a new surveillance tool that uses both analyst forecasts and traditional bank metrics to track emerging banking fragilities.
- While rising rates can benefit banks through higher interest income, they also pose risks, such as increased loan losses and devaluation of debt securities. The article cites the failure of Silicon Valley Bank as an example of what can happen when these risks materialize.
- A new global stress test, which included almost 900 lenders across 29 countries, revealed that while the banking system seems resilient, certain scenarios could significantly impact it. For instance, severe stagflation combined with higher interest rates could increase the number of weak institutions, affecting a substantial portion of global bank assets.
- The article emphasizes the need for new policy measures, including more comprehensive and severe stress tests, proactive bank supervision, higher international standards for monitoring and managing liquidity and interest rate risks, and better preparedness among banks to access central bank lending facilities.
- The findings suggest that banks and regulators should use the current period of relative stability to strengthen their systems, preparing for potential future stress caused by prolonged high interest rates.
The article serves as a prelude to a more detailed discussion in Chapter 2 of the IMF’s October 2023 Global Financial Stability Report, titled “A New Look at Global Banking Vulnerabilities.”
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Source: New Look at Global Banks Highlights Risks From Higher-for-Longer Interest Rates (imf.org)
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