IMF urges ‘vigilance’ as it warns over increased financial stability risks
The head of the International Monetary Fund (IMF) has called for vigilance as she warned that the global economy faces increased financial stability risks amid turmoil in the banking industry.
Kristalina Georgieva, managing director of the IMF, said that attempts by central banks to combat inflation by pushing up interest rates has created strains in the wider financial system at a time of sky-high debt levels.
Speaking at a conference in Beijing on Sunday, she said: “The rapid transition from a prolonged period of low interest rates to much higher rates necessary to fight inflation inevitably generates stresses and vulnerabilities, as we have seen in recent developments in the banking sector.”
It comes as fears about the health of the global banking industry persist after the failure of Silicon Valley Bank (SVB) earlier this month and the rescue of Credit Suisse by rival UBS.
Investors are bracing for another week of turbulence in global markets as fears over the banking system complicate efforts by central banks to fight inflation.
US authorities are also weighing up options to provide support to embattled regional lender First Republic to give it more time to shore up its balance sheet.
On Friday, banking stocks slumped yet again, with shares in Deutsche Bank falling as much as 14pc after a spike in the cost of insuring against the German lender defaulting on its debts.
KPMG said on Monday that turmoil in financial markets risked upending a brightening outlook for the economy. The Big Four accountant said that the risk of the UK tipping into recession this year had fallen but not “dissipated entirely”, with the economy tipped to shrink by 0.3pc.
Andrew Bailey, the Governor of the Bank of England, is set to face questions from MPs on Tuesday morning over the collapse of SVB UK, which was bought by HSBC for £1.
Despite a failure to calm investor fears, Ms Georgieva welcomed efforts by governments and regulators to stem a crisis of confidence in the sector.
Ms Georgieva said: “We also have seen policymakers acting decisively in response to financial stability risks and we have seen advanced economy central banks enhancing the provision of US dollar liquidity.
“These actions have eased market stresses to some extent but uncertainty is high and that underscores the need for vigilance.”
However, European regulators have been at loggerheads with their US counterparts over the latter’s decision to issue a blanket guarantee for all of SVB’s depositors.
Mr Bailey last week criticised the US government’s decision to bail out SVB's depositors, saying the blanket guarantee increased the risk of “moral hazard” in the banking industry. Moral hazard is the fear that banks and investors will take large risks if they believe they will be protected from any potential consequences if things go wrong.
On Saturday, Switzerland's finance minister warned that so-called “too big to fail” rules drawn up by global regulators in the wake of the financial crisis were not fit for purpose, as she said Credit Suisse would not have survived another day had the Government not engineered the emergency rescue deal.
Meanwhile, top bosses at the beleaguered lender are facing the threat of a regulatory investigation and disciplinary action over how they ran Credit Suisse in the lead-up to its near collapse.
Marlene Amstad, head of Switzerland’s financial regulator Finma, told local media on Sunday: “Credit Suisse had a cultural problem that translated into a lack of accountability. Often it was not clear who was responsible for what. This favoured a negligent handling of risks.”
She said it remained an “open question” whether officials would launch fresh proceedings into the bank, adding: “We’re not a law enforcement agency, but we’re exploring options.”
The IMF’s Ms Georgieva also said that uncertainties in the world economy remained “exceptionally high”, owing to geopolitical tensions between the US and China, the war in Ukraine, “scarring” from the pandemic and monetary tightening.
She added that the outlook for the global economy over the medium-term is likely to “remain weak”.
Ms Georgieva hailed China as one of the few “green shoots” in the world economy, adding that a strong rebound in the communist state’s economy is important not only for itself, but for the world.
She said: “The robust rebound means China is set to account for around one third of global growth in 2023 – giving a welcome lift to the world economy.”
