IMF Says 'Weak Tail' Of Banks Could Struggle In An Economic Downturn

• IMF states that about 5% of global banks are vulnerable to stress with prolonged higher central bank interest rates. A further 30% of banks, including major ones, could be vulnerable during a period of low growth and high inflation ("stagflation").
• The assessment is based on a new global stress test applied to 900 lenders in 29 countries after the recent collapses of major banks. Tobias Adrian, IMF's director, highlights the weak tail of banks in many countries and emphasizes the need for strong regulatory oversight and increased bank resilience.
• The report emphasizes the importance of proactive and intrusive supervision by governments and regulators and advocates for timely corrective actions.
• The IMF calls for urgent efforts to enhance bank resilience by boosting capital levels. The warning comes amidst gatherings of global financial leaders in Marrakech, Morocco, for the IMF and World Bank annual meetings.
• Recent U.S. Federal Reserve interest rate hikes resulted in losses on government bond portfolios for regional U.S. banks, leading to subsequent failures.
• The report suggests that weak banks experience a decline of more than five percentage points in capital levels or fall below a floor of 7%. Under baseline conditions, 55 banks (4% of global assets) were identified as weak, rising to 215 banks (42% of assets) in the stagflation scenario.
• The IMF recommends central banks maintain higher rates until inflation subsides and warns against premature easing of monetary policy based on historical caution. The U.S. Federal Reserve is expected to continue raising rates to manage inflation, signalling another hike before the end of the year and potential rate levels above 5% by 2024.

(Source: Reuters)