IMF Managing Director: "Financial Sector Vulnerabilities Exposed... Caution Needed"

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), warned on the 1st (local time) that "financial vulnerabilities have been exposed in the rapid transition from a low interest rate era to a high interest rate era," urging the banking sector to remain vigilant against additional risks.

According to Bloomberg and other sources, Georgieva attended the 'Milken Institute Global Conference 2023' held at the Beverly Hilton Hotel in Los Angeles (LA), USA, and said, "What we have experienced over the past few years has been a series of unimaginable events such as the pandemic, the Ukraine war, and rapid interest rate hikes."

Regarding the banking crisis triggered by Silicon Valley Bank (SVB), which spread concerns in the financial market, she pointed out, "There was some complacency in the United States and unnecessary deregulation of banks." She also said, "We have seen the price to pay for that," adding, "There are things that need to be done to reduce these risks."

These remarks drew attention as they came shortly after the closure of First Republic Bank, which had been plagued by crisis rumors following the SVB incident, and JP Morgan's acquisition of First Republic was announced. First Republic's bankruptcy is the second largest in U.S. history after Washington Mutual, which collapsed during the 2008 financial crisis excluding investment banks like Lehman Brothers. This year, it became the fourth bank to close in the U.S. following Silvergate, SVB, and Signature Bank, which were shut down in March.

Earlier, the IMF's World Economic Outlook report released last month also contained warnings about the possibility of financial instability due to the SVB incident. The report pointed out that last year's rapid monetary tightening triggered significant losses in long-term bond assets and increased funding costs, predicting that further tests of the financial system would continue. Specifically, it added that financial institutions with excessive leverage, credit risk, and high reliance on short-term funding, as well as countries with weak fundamentals, could be the next targets.

Georgieva forecasted that this year's growth rate would slow to 2.8% and remain around 3% over the next five years. She expressed concern that additional downside risks could increase as accumulated monetary tightening policies, the aftermath of Russia's invasion of Ukraine, and financial stress combine.

Furthermore, Georgieva stated, "Inflation is not falling as quickly as desired," and mentioned, "Global inflation this year will be around 7%." This level far exceeds the price stability targets of central banks worldwide, including the Fed. She added, "Central banks, including the U.S. Federal Reserve (Fed), must maintain strict interest rates at the point where they can lower inflation."

In addition, she reported that China, a major creditor, has recently shown a proactive attitude regarding debt restructuring issues in developing countries.

Meanwhile, the IMF highly praised the U.S. regulatory authorities for their swift action in deciding the bankruptcy of First Republic and finding a buyer early this morning. An IMF spokesperson said, "Recent events continue to remind us of the challenges arising from the interaction between monetary policy and financial conditions tightening and increased vulnerabilities in the global financial system," and expressed gratitude that "U.S. regulators resolved the troubled bank (First Republic) quickly and orderly."

This content was produced with the assistance of AI translation services.