The International Monetary Fund was set up in the aftermath of World War II and currently has a membership of 189 of the world’s 195 nations. It aims to “foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world”. The IMF is based in Washington DC in the USA and has a headquarters staff of 2600, drawn from 147 of its member states.
The IMF produces two annual reports and the latest warns of “medium-term” risks to the global economy due to potential financial instability, notably in China, Japan and Europe. It notes that the outcome of the UK referendum was a surprise, but that the markets have absorbed the shock, so far. It identifies weak bank profits as a growing risk to financial stability. Whilst few will have sympathy for harder times for bankers, the IMF believes that reduced profitability will hamper banks’ abilities to build up capital reserves and could stifle both business and consumer lending (potentially damaging economic expansion and consumer demand). Interest rates in the developed world are still near historic lows and this is having an influence on bank profitability. The report notes that pension funds and insurance companies are also suffering from persistent, very low interest (often being constrained to make only low-risk investments).
Banks, and European banks in particular, have been forced to hold more liquid assets (capital) to ensure that they could cope with an unexpected financial crisis. The report acknowledges this, but suggests more needs to be done. Italian and Portuguese banks were identified as facing serious challenges due to problem loans (defaults), capital reserves and profitability.
In Japan, persistent economic weakness and ultra-low (and negative) central bank interest rates have pushed banks to expand overseas, leaving them exposed to risk related to access to local currencies in which they operate.
Short-term risks to global financial stability have eased since the first report for 2016 was issued (April). Rising commodity prices and easing (immediate) concerns for China’s economy have contributed to a reduction of pressure on emerging markets. The IMF cautions “shadow banking” (lending from businesses not regulated as banks) in China is a risk to stability. Also, interconnections within the Chinese financial sector mirror the weaknesses in the global financial system behind the Global Financial Crisis, meaning that the failure of one institute can have a knock-on effect with others it trades with.