A report by the IMF has warned that a large share of the banking sector will continue to struggle until 2025 even as the economy makes a recovery.
A simulation exercise cited in the ‘Global Financial Stability Report’ found that banks across nine countries will find it difficult to generate profits over the coming years, with the coronavirus pandemic expected to bring low interest rates and tighter margins for a sustained period of time.
“Underlying profitability pressures are likely to persist over the medium- and longer-term even once the global economy begins to recover from the current shock” the IMF said.
This latest news will just add to the misery for the sector, which has already been hit hard by the economic impacts of the pandemic. The report was quick to highlight though that the challenges faced by banks predate the pandemic, although the current situation has definitely exacerbated matters.
The report said that banks are well prepared for this negative outlook due to buffers put in place since the financial crisis, but some policymakers believe more needs to be done to offer protection to households and businesses. Evidence also exists that some banks have taken on additional risk due to the lengthy period of low interest rates prior to the pandemic.
“it is crucial that policymakers rapidly employ a combination of policies that maintain the balance between preserving financial stability, maintaining the soundness of financial institutions, and supporting economic activity.” the report noted.
“These include an adequate provision of liquidity by central banks and clear supervisory guidance on the prudent renegotiation of loan terms, the use of the flexibility embedded in existing regulatory frameworks to account for expected credit losses, and the use of existing buffers to absorb costs.”