Financial risks could linger in US & EU – IMF

The International Monetary Fund (IMF) has warned that the recent banking turmoil in the United States and Europe could spread to crucial non-bank institutions such as pension funds, further complicating central banks’ fight against high inflation. According to the IMF, banking risks could intensify in the coming months amid the continued tightening of monetary policy globally, which could lead to the non-bank sector being affected. Non-bank financial intermediaries (NBFI) such as pension and investment funds have grown dramatically since the 2008 global financial crisis, and the IMF said that NBFIs are highly interconnected with traditional banks and can become a crucial amplification channel of financial stress.

The IMF’s warning was published alongside a chapter from its biannual report on global financial stability. The report also stated that the sheer size of the NBFI sector means that “the smooth functioning of the nonbank sector is vital for financial stability.” The IMF economists said that policymakers must use a range of tools to address the problem, including enacting more robust surveillance and regulation of the sector, and forcing companies to share more data about the risks they are taking.

Central banks on both sides of the Atlantic have been walking a fine line as they attempt to tackle high inflation by raising interest rates without adding to the turmoil in the banking sector. This comes after the dramatic collapse of Silicon Valley Bank (SVB) which collapsed after it took on excessive interest-rate risk, which left it over-exposed when the US central bank began its aggressive campaign of interest-rate hikes last year. The IMF said that central banks have a role to play, which should be focused on temporary, targeted support for NBFIs that pose risks to financial stability, and for those considered to be systemically important.

In conclusion, the IMF has called for a range of measures to be taken to address the issue, including robust surveillance and regulation of the non-bank financial sector, and temporary, targeted support for NBFIs that pose risks to financial stability. The IMF economists also emphasised that the smooth functioning of the non-bank sector is vital for financial stability, given the size of the sector and its interconnection with traditional banks. The warning comes as central banks on both sides of the Atlantic attempt to tackle high inflation by raising interest rates without adding to the turmoil in the banking sector, and amid concerns that the recent banking turmoil in the United States and Europe could spread to non-bank institutions such as pension funds.