{
  "title": "New Look at Global Banks Highlights Risks From Higher-for-Longer Interest Rates",
  "publication": "IMF Blog, October 16, 2023",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2023/10/16/new-look-at-global-banks-highlights-risks-from-higher-for-longer-interest-rates",
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  "summary": "Higher interest rates have exposed vulnerabilities in some banks, and many more would be weakened by a prolonged period of tight monetary policy",
  "sections": [
    {
      "heading": "Context and overview",
      "content": "- Central banks could keep interest rates higher for longer to curb inflation that remains stubbornly high in many countries, which may slow economies.\n- This interest-rate environment is unprecedented in a generation for global financial markets and requires sharpened analytical tools and regulatory responses.\n- IMF enhancements: stress-testing tools focused on rising interest rates and funding pressures; a new surveillance tool using analyst forecasts and traditional bank metrics; these tools use public data to complement supervisory stress tests and IMF-World Bank Financial Sector Assessment Programs."
    },
    {
      "heading": "How rising rates affect banks",
      "content": "- Banks can benefit by collecting higher interest rates from borrowers while keeping deposit rates low.\n- Risks:\n  - Loan losses may increase as consumers and businesses face higher borrowing costs, especially if they lose jobs or revenues.\n  - Banks’ holdings of bonds and other debt securities lose value when interest rates rise, potentially forcing sales at a loss under sudden deposit withdrawals or funding pressures.\n  - The failure of Silicon Valley Bank exemplified the bond-loss channel.\n- Central bank lending facilities, such as the Federal Reserve’s discount window, can reduce losses from forced securities sales under deposit-run scenarios."
    },
    {
      "heading": "Global stress-test findings",
      "content": "- Scope: almost 900 lenders across 29 countries.\n- Baseline scenario (aligned with the latest IMF World Economic Outlook) identified:\n  - 30 banking groups with low capital levels, together accounting for about 3 percent of global bank assets.\n- Severe stagflation scenario (high inflation with a 2 percent global economic contraction and even higher central bank interest rates) results:\n  - 153 weak institutions, accounting for more than a third of global bank assets.\n- Geographic pattern:\n  - Excluding China, there are many more weak banks in advanced economies than in emerging markets."
    },
    {
      "heading": "Surveillance tool and back testing",
      "content": "- Tool inputs: traditional supervisory metrics (e.g., ratio of capital to assets) and market indicators (e.g., market price to book value of bank equity).\n- Flagging rule: banks flagged for further review if outliers across three or more of five risk metrics—capital adequacy, asset quality, earnings, liquidity, and market valuation.\n- Back testing outcomes:\n  - Surge of potentially vulnerable institutions at the onset of the pandemic.\n  - Sustained rise in late 2022 as higher interest rates began to bite; this latter group included the four banks that either failed or were taken over in March.\n- Current indicators (market data and consensus analyst forecasts) point to:\n  - A substantial group of smaller banks at risk in the United States.\n  - Concern for some lenders in Asia, including China, and Europe as liquidity and earnings pressures persist."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Stress testing:\n  - Supervisory stress tests should include market-based analysis.\n  - Tests should include smaller lenders.\n  - Scenarios should be more severely adverse yet still plausible.\n- Supervisory capacity:\n  - Bank supervisors need to be proactive and ready to address identified weaknesses.\n  - More than half of economies do not have independent bank supervisors with adequate resources (per IMF Financial Sector Assessment Program findings).\n- Regulatory standards:\n  - International standards need raising to manage liquidity and interest rate risks in banks.\n  - At least one-fifth of economies have weak supervisory and regulatory practices to monitor and address these risks.\n- Central bank access:\n  - Banks should be better prepared to access central bank lending facilities.\n  - Banks should periodically test such access while supervisors assess whether weaker lenders can easily tap emergency assistance."
    },
    {
      "heading": "Near-term priorities",
      "content": "- Use the current lull in banking strains to increase resilience in banks, regulators, and supervisors.\n- Prepare for a possible resurgence of banking risks if interest rates stay higher for longer than currently priced in markets.\n\n—This blog is based on Chapter 2 of the October 2023 Global Financial Stability Report, “A New Look at Global Banking Vulnerabilities.”\n\n---\n\n\n References\n\n- outlined in a chapter\n- IMF World Economic Outlook\n- ready and willing\n- Financial Sector Assessment Program\n- Global Financial Stability Report\n\nSource: https://www.imf.org/en/blogs/articles/2023/10/16/new-look-at-global-banks-highlights-risks-from-higher-for-longer-interest-rates"
    }
  ],
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    "[Markdown version](/en/blogs/articles/2023/10/16/new-look-at-global-banks-highlights-risks-from-higher-for-longer-interest-rates/index.md)",
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    "Authors: Charles Cohen, Srobona Mitra, Fabio Natalucci",
    "Published: October 16, 2023",
    "Central banks could keep interest rates higher for longer to curb inflation that remains stubbornly high in many countries, which may slow economies.",
    "This interest-rate environment is unprecedented in a generation for global financial markets and requires sharpened analytical tools and regulatory responses.",
    "IMF enhancements: stress-testing tools focused on rising interest rates and funding pressures; a new surveillance tool using analyst forecasts and traditional bank metrics; these tools use public data to complement supervisory stress tests and IMF-World Bank Financial Sector Assessment Programs.",
    "Banks can benefit by collecting higher interest rates from borrowers while keeping deposit rates low.",
    "Risks:",
    "Central bank lending facilities, such as the Federal Reserve’s discount window, can reduce losses from forced securities sales under deposit-run scenarios.",
    "Scope: almost 900 lenders across 29 countries.",
    "Baseline scenario (aligned with the latest IMF World Economic Outlook) identified:",
    "Severe stagflation scenario (high inflation with a 2 percent global economic contraction and even higher central bank interest rates) results:",
    "Geographic pattern:",
    "Tool inputs: traditional supervisory metrics (e.g., ratio of capital to assets) and market indicators (e.g., market price to book value of bank equity).",
    "Flagging rule: banks flagged for further review if outliers across three or more of five risk metrics—capital adequacy, asset quality, earnings, liquidity, and market valuation.",
    "Back testing outcomes:",
    "Current indicators (market data and consensus analyst forecasts) point to:",
    "Stress testing:",
    "Supervisory capacity:",
    "Regulatory standards:",
    "Central bank access:",
    "Use the current lull in banking strains to increase resilience in banks, regulators, and supervisors.",
    "Prepare for a possible resurgence of banking risks if interest rates stay higher for longer than currently priced in markets.",
    "[outlined in a chapter](https://www.elibrary.imf.org/display/book/9798400249686/CH002.xml)",
    "[IMF World Economic Outlook](https://www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023)",
    "[ready and willing](https://www.imf.org/en/Blogs/Articles/2023/09/18/financial-stability-needs-supervisors-with-the-ability-and-will-to-act)",
    "[Financial Sector Assessment Program](https://www.imf.org/en/About/Factsheets/Sheets/2023/financial-sector-assessment-program-FSAP)",
    "[Global Financial Stability Report](https://www.imf.org/en/Publications/GFSR/Issues/2023/10/10/global-financial-stability-report-october-2023)"
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