Corporate Sector Vulnerabilities and High Levels of Interest Rates
Departmental Papers, January 13, 2025
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Bibliographic details
- Authors: Bruno Albuquerque, Nassira Abbas, José M. Garrido, Deepali Gautam, Benjamin Mosk, Thomas Piontek, Anjum Rosha, Thierry Tressel, Aki Yokoyama
- Published: January 13, 2025
- Series: Departmental Papers
- DOI: https://doi.org/10.5089/9798400292385.087
Overview
- Provides a comprehensive overview of corporate sector vulnerabilities that have emerged post-pandemic, with focus on financial stability implications in a new environment of high interest rates.
- Notes that although several central banks have recently started cutting interest rates, the expectation is that high interest rates, above pre-pandemic levels, are here to stay.
- Emphasizes the importance of designing and deploying policies to prevent and mitigate risks from the corporate sector.
Main findings
- Interest rate transmission and corporate distress
- Interest rate increases may transmit more strongly to the real economy in the current environment since the global share of financially distressed firms has been trending upwards, especially in emerging markets (EMs).
- Lagged effects of past monetary policy tightening may have adverse effects on firms’ capacity to invest.
- Adverse macroeconomic scenario impacts
- An adverse macroeconomic scenario of negative demand shocks coupled with higher interest rates would lead to a fast and large increase in corporate defaults.
- Financial stability risks would increase materially, especially for EMs and less-developed banking systems, as bank capital buffers would fall considerably in this scenario.
- Role of nonbanks
- The increasing role of nonbanks in corporate credit intermediation in advanced economies may amplify overall financial stability risks.
- Since the GFC, nonbanks have been increasing their exposure to riskier firms and to the less productive segment of the economy, including zombie firms and nontradable firms.
- Migration of credit to the unregulated sector raises concerns about propagation of risks to the rest of the financial system from a potential corporate default cycle.
- Insolvency and restructuring regimes
- Documents some progress on insolvency and restructuring regimes to deal with corporate distress since the pandemic.
- Several shortcomings persist that prevent countries from resolving firms quickly in a potential scenario of an intensification of corporate distress.
Policy implications and recommendations
- Strengthen preparedness for higher-for-longer interest rate environment by designing and deploying policies to prevent and mitigate corporate sector risks.
- Prioritize closing data gaps on nonbank credit intermediation to monitor exposures and risk migration.
- Consider extending the regulatory perimeter to nonbanks to improve overall resilience of the financial sector.
- Enhance insolvency and restructuring frameworks to enable quicker resolution of distressed firms in case of intensified corporate distress.
Key themes and subject tags
- Subjects: Business enterprises; Corporate sector; COVID-19; Credit; Economic sectors; Financial sector policy and analysis; Health; Money; Solvency
- Keywords: Business enterprises; Corporate sector; corporate stress tests; corporate vulnerabilities; COVID-19; Credit; crisis preparedness indicator; differential effect; financial stability; Global; IMF Library; insolvency frameworks; monetary policy; monetary policy shock; nonbank financials; nonbanks; nonfinancial corporates default probability; Solvency
Source: Corporate Sector Vulnerabilities and High Levels of Interest Rates (January 13, 2025).
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