According to the International Monetary Fund (IMF), the recent problems faced by banks in the US and Europe show how vulnerable the financial sector is after years of extremely low interest rates. Such risks could intensify in the coming months against the backdrop of interest rate hikes by central banks, according to a blog post published on Tuesday, which will accompany an analytical chapter in the "Global Financial Stability Report", which is due to be published next week. Attention must also be paid to neighbouring areas - such as pension funds, insurers and hedge funds. These have gained significantly in importance since the financial crisis 15 years ago. They account for almost half of the world's financial assets. Here, the weaknesses seemed to have increased over the past ten years.

Martin Hock

Editor in business.

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The IMF called on policymakers to implement strict supervision, regulation and supervision of these institutions and to ensure that non-bank financial institutions better manage risk. Among other things, it should ensure timely disclosure of data and tighten the requirements for corporate governance. This would create incentives for these non-banks not to take excessive risks on their own, write the authors led by Antonio Garcia Pascual, deputy head of the Global Market Analysis Department. "It would also likely reduce the need and frequency of central bank interventions to provide liquidity support during systemic stress events."

Central banks in conflict

The IMF focused on four case studies: the turmoil surrounding the UK pension fund at the end of 2022, credit markets for project finance in South Korea, commodity trading firms and financial stability risks, and vulnerabilities in private credit markets. Although the IMF did not mention any companies by name, the connection with the collapse of the crypto company FTX and the medium-sized banks Silicon Valley Bank, Silvergate and Signature Bank cannot be overlooked.

Turbulence in credit markets could put central banks in a dilemma between financial stability and inflation targets, and they would have to explain clearly the reasons for providing liquidity in times of generally tighter policies. "Coordination between the central bank and financial sector supervisors is essential not only for identifying risks, but also for managing crisis situations and assessing supervisory and regulatory deficiencies," the IMF said.

Dimon criticizes regulation

Meanwhile, Jamie Dimon, head of JP Morgan Chase, the largest bank in the US, warned of further turbulence in the banking industry itself. "The current crisis is not over yet, and even if it is behind us, it will continue to have an impact for years to come," he wrote in his annual letter to shareholders published Tuesday. Nevertheless, Dimon appealed to politicians not to overreact by tightening rules for banks, although he admitted that the current set of rules had not prevented the failure of Silicon Valley and Signature Bank.

However, the bank's mistakes had been facilitated by regulation and had "hidden on the presentation plate". "Ironically, banks were encouraged to hold very safe government securities because they were seen by regulators as highly liquid and had very low capital requirements," Dimon writes. The regulations would have prompted banks to stock up on assets that lost value as interest rates rose. Worse still, the Federal Reserve did not test banks for the consequences of a rise in interest rates. "It's not about absolving bank management — it's just about making it clear that this hasn't been a highlight for many players," Dimon writes.

JP Morgan is trying to mitigate the impact of these regulations by examining areas of business that require little or no capital. This could include an expansion of trade analytics or even travel. The complex regulations pushed banks out of the mortgage business, as they drove up the cost of granting and servicing loans and increased liability. JP Morgan is "holding out", but many banks have divested themselves of much of this business. Wells Fargo, for example, announced earlier this year that it would drastically reduce its mortgage business.

The recent crisis has unsettled the financial market and will undoubtedly lead to a tightening of financing conditions as banks and other lenders become more conservative. You yourself check customers more strictly. However, it is unclear whether this turbulence could also slow down consumption in the USA. In addition, this banking crisis affects far fewer financial actors and fewer problems that need to be solved than in the crisis of 2008. JP Morgan recently played an important role in coping with the banking quake. Dimon helped organize a $30 billion cash injection from eleven major lenders for the ailing regional financial institution First Republic Bank.