IMF warns Central Banks on potential banks’ failure

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Although banks are now stronger than pre-2008 global financial crisis, they still face some challenges. Experts at International Monetary Fund (IMF) have, therefore, admonished central banks to ensure that the post-crisis regulatory reform agenda is completed and implemented.

Addressing a press conference at the on-going Annual Meetings of the IMD/World Bank in Bali, Indonesia, Financial Counsellor and Director, Monetary and Capital Markets Department at the IMF, Mr. Tobias Adrian who led others explained that banks have increased their capital and liquidity, but many banks remain vulnerable due to lending to highly indebted borrowers, holdings of illiquid and opaque assets, or reliance on foreign fragile currency funding.

“Looking ahead, it remains crucial to strengthen the resilience of the financial system by addressing financial vulnerabilities.

“They should resist calls for rolling back reforms. Central banks should continue to normalize monetary policy gradually, and they should communicate their decisions clearly.”

They advised emerging market and low-income economies like Nigeria to build buffers against external risks, should pursue exchange rate flexibility, and should consider timely targeted foreign exchange interventions.

“Regulators should address vulnerabilities by deploying micro and macroprudential policy tools, including supervisory capital buffers where appropriate.

“They should also develop new tools to address vulnerabilities outside the banking sector.

“For example, they should tackle underwriting standards and non-bank credit intermediation and liquidity risks among asset managers.

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“Regulators and supervisors must remain attuned to new risks, including possible threats from cyber risks. They should also support fintech’s potential contribution to innovation, efficiency, and inclusion while safeguarding against risks to the financial system.

“To sum up, this is a time for more proactive measures to safeguard financial stability. Confidence must not become complacency.”

The team who was elaborating on Global Financial Stability Report said there were two broad sets of risks.

“One, short-term transitional risks as they relate to contractual risks, for example, for derivative contracts, as you indicated, including CCPs, and the recognition of CCPs and the ability to provide services cross-border if one of these should relate to derivatives contracts.

“Continuity of contracts, primarily is the concern here, although we note, we think that these contracts remain valid in principle.

It relates also to insurance contracts. There are operational risks related to banks, insurance companies, asset managers, and so on. Those are like transitional short-term risks.

“There are also medium-term challenges that relate to the ultimate deal that will be reached, and so those have to do with the risk of fragmentation of liquidity, the possible duplication of trading venues, and relating efficiencies, risk management issues for financial institutions, as well as data sharing.

So, generally speaking, the policy recommendation here is that the private sector should continue to be prepared and prepare for whatever the ultimate Brexit deal is, that authorities should continue to engage with the private sector and make clear what the contingencies are in the event of a hard Brexit, as well as, of course, be ready essentially for whatever the ultimate agreement would be.”

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