IMF Warns "36% of Major Global Banks' Assets at Risk if Stagflation Occurs"

[Image source=Reuters Yonhap News]

The International Monetary Fund (IMF) has warned that if the global economy falls into 'stagflation' (economic stagnation accompanied by rising inflation), about one-third of the world's major bank assets could be at risk.

According to the 'Global Financial Stability Report' (GFSR) released on the IMF website on the 15th, a stress test conducted by the IMF on approximately 900 financial institutions across 33 countries worldwide revealed that around 60 banks have low capital levels. In terms of proportion, this accounts for about 5% of global bank assets.

The problem is that if stagflation materializes in the future, the banking sector crisis will become much more severe.

The IMF projected that one-fifth of all surveyed banks, representing about one-third (36%) of global bank assets, will see their Common Equity Tier 1 (CET1) ratio fall below the regulatory threshold of 7%. This includes systemically important banks (SIBs) in China, Europe, and the United States.

The CET1 ratio indicates how much common equity capital a financial institution holds relative to its risk-weighted assets, reflecting the institution's ability to absorb losses during a crisis. A higher ratio means the financial institution is safer.

The IMF estimated that the CET1 ratio of global financial institutions will decline from 12.6% last year to 10.1% next year, with China experiencing the largest drop of -3.9%, followed by the Eurozone (-3.4%) and the United States (-1.6%).

This scenario assumes a 2% contraction in the global economy amid rising unemployment and a 200 basis point (1bp = 0.01 percentage point) increase in interest rates. The likelihood of such a scenario occurring next year is 5%.

The IMF explained, "If financial conditions tighten sharply, it could once again test the resilience of the global financial system. In particular, as borrowers' debt repayment capacity decreases and credit growth slows, the global credit cycle has begun to turn. Therefore, the risks to global growth are skewed to the downside."

In fact, the IMF recently forecasted in its World Economic Outlook (WEO) that global economic growth will slow from 3.5% last year to 3.0% this year and 2.9% next year.

While the forecast for next year was lowered by 0.1 percentage points from the previous 3.0% within three months, the global consumer price inflation forecast was raised by 0.6 percentage points to 5.8%. Many advanced countries are experiencing high core Consumer Price Index (CPI) levels, and with continued high interest rates, borrowers' debt repayment burdens are increasing, raising concerns about economic contraction.

The IMF emphasized that while large emerging markets maintain resilience, markets with weaker fundamentals continue to face difficulties, highlighting the urgent need for strengthened regulation and supervision of the financial sector. Tobias Adrian, head of the IMF's Monetary and Capital Markets Department, stated, "Central banks must remain resolute in their fight against inflation until there is evidence that inflation is consistently moving toward their targets."

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