IMF Global Financial Stability Report 2020

IMF: Pandemic dramatically impacts the financial system

The IMF sees financial markets heavily impacted by the COVID-19 crisis, the Fund’s Financial Counsellor Tobias Adrian said at the press briefing of the Global Financial Stability Report (GFSR) on Tuesday. A further intensification of the crisis could threaten global financial stability. 

“We are facing an unprecedented crisis and it is key to take aggressive policy steps to contain the health threat, to contain the economic threat and to contain the financial stability threat. We’re going into this crisis with a banking system that has more capital and liquidity than in previous crises. And hopefully the aggressive policy measures that have already been rolled out around the world will help to get our membership through this crisis.”

Adrian said that overall, he expects interest rates and inflation to stay low for an extended period.

“While we can never exclude that inflation might rise suddenly or that interest rates might spike suddenly, at this time, the expectation is that both rates and inflation will remain low for an extended period. At the same time, some countries might experience higher interest rates because of risk concerns in these countries. So not all countries benefit as much from lower yields as countries such as the US, Germany or Japan. Some countries might see somewhat higher interest rates and that is certainly a risk for those countries.”

Banks are generally better prepared to deal with the fallout from the pandemic than before the financial crisis, Adrian remarked.

“Today, of course, we are in the very adverse economic scenario and under the WEO baseline we do expect that most banks and most banking systems are going to be stable. Of course, some banks, in every country there’s a weak tail of banks, and in some countries banking systems might be weaker than in other countries. And furthermore, some countries might be hit particularly hard by this crisis.”

“The banking system has much more capital and much more liquidity than it had at the onset of the 2008 crisis. Capital levels have increased dramatically as regulations of the banking system have tightened. Supervisors at the IMF have spent the past decade running supervisory stress tests and FSAP stress tests, and those have shown that banks are resilient to way adverse economic scenarios.”