World leaders are to discuss the threat of a new banking crisis in Washington after the International Monetary Fund warned that financial instability risks triggering a global recession.
As its spring meetings began on Tuesday, the fund (IMF) said that the risks of financial turmoil have “increased rapidly” in the last six months ebcause of higher interest rates.
Andrew Bailey, the Governor of the Bank of England, will be giving two speeches on Wednesday in which he will address the market turmoil that brought down Silicon Valley Bank in the US and forced the Swiss authorities to engineer a rescue takeover of Credit Suisse.
A Treasury source said that Jeremy Hunt, the Chancellor, will also discuss how to avoid a banking crisis in meetings with counterparts from around the world in Washington this week.
The IMF fears that high interest rates are piling pressure onto vulnerabilities that have built up in financial markets since the 2008 credit crunch.
Because inflation has remained higher for longer than expected, the rapid pace of rate rises to tackle it is causing “fundamental shifts in the financial risk landscape”, the fund said.
Tobias Adrian, financial counsellor at the IMF, said there is now a one in 20 chance of a financial crisis that will send global GDP tumbling by 2.8pc.
There is also a separate one in 20 chance of market turmoil that would trigger a smaller 1.3pc fall in global economic output.
Another jump in inflation risks spooking banks into holding back on lending, with severe consequences for consumers and businesses.
Mr Adrian said: “Stresses could then re-emerge in the financial system. Trust – the foundation of finance – could continue to erode. Funding could disappear rapidly for banks and non-banks, and fears could spread, amplified by social media and private chat groups.”
Pierre-Olivier Gourinchas, the IMF's economic counsellor, warned that the world is entering a “perilous phase”. The UK pension crisis last autumn and the collapse of US regional lenders including Silicon Valley Bank show that there are significant vulnerabilities in the world’s financial institutions, he said.
This creates the danger of another crisis such as the one that engulfed Credit Suisse, long a weak bank, which was taken over by rival UBS following a precipitous drop in its share price.
Mr Gournichas said: “The financial system may well be tested again. Once again, downside risks dominate. Nervous investors often look for the next weakest link, as they did with Credit Suisse.”
The risk that growth falls below the IMF’s 2.8pc forecast this year is no less than 62pc.
In addition to the danger posed by inflation, non-bank financial institutions, such as pension funds and hedge funds, could be exposed to the wave of defaults that come with a slowing economy.
There is a particular threat to banks in large emerging market economies, which typically hold riskier debt, the IMF said.
So far, these banks have been relatively protected because they are less exposed to rising interest rates.
Mr Adrian called for tighter regulation to prevent “severe repercussions”. If the financial distress hits the broader economy, policymakers will have to cut interest rates, he said.
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April 12, 2023 at 02:25AM
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'Severe' banking crisis threatens worldwide recession, IMF warns - The Telegraph
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