The International Monetary Fund has warned global banks against taking excessive risks due to profitability pressures once the Covid-19 crisis is resolved.
In its Global Financial Stability report released on 22 May, the group expects profitability in the banking sector to be hit but said that regardless of this, central banks must continue to provide liquidity to the financial system.
The report dedicates three chapters to credit markets, managing volatile portfolios and the banking sector.
The group predicts that banks will only benefit from a simulated return on equity in 2025, which will be “somewhat better” than in 2020. In its analysis of a sample of banks in nine advanced economies, including the UK, the US and France, the IMF expects the Euro area and low-interest-rate economies would be particularly affected.
Central banks have also been urged to provide “clear supervisory guidance” on the renegotiation of loan terms after the crisis and to maintain the soundness of financial institutions.
Policymakers should consider the use of the flexibility embedded in regulatory frameworks to account for expected credit losses as well as leaning on the existing buffers to absorb costs, the report said.
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