Inflation, high interest rates could cause funding problems for weak banks, IMF warns

The International Monetary Fund (IMF) has warned that banks facing higher credit risks could have funding problems due to further sharp tightening of financial conditions.

IMF, in a report on Tuesday, said a survey carried out in many countries has proved that lending has slowed down in the banking sector because of rising borrower risk.

The fund said central banks across the world have been tightening their monetary policy rate to curb inflation, but should inflation prevail alongside rising interest rates, and drag the global economy into recession, banks will lose significant amounts of equity capital.

“Investors and depositors will scrutinize the prospects of banks if their stock-market capitalization falls below the value of balance sheet, causing funding problems for the weak bank,” the report reads. 

IMF averred that financial companies that are not into core banking but lend in private markets — such as hedge funds and pension funds — could also be affected.

The report said policymakers can prevent bad outcomes, advising that central banks must remain determined in bringing inflation back to target.

IMF opined that without price stability, sustained economic growth and financial stability are not possible.

“If financial stability is threatened, policymakers should promptly use liquidity support facilities and other tools to mitigate acute stress and restore market confidence.” 

The Bretton Woods institution asked central banks to enhance financial sector regulation and supervision due to the importance of healthy banks to the global economy.