IMF Warns That US Banks May Struggle to Recover Even as Global Economy Recovers

In a Friday report, the International Monetary Fund IMF said banks across the major nine global economies will struggle to generate profits for the next five years even as global economies recover. Stating that, besides the immediate challenges that arise from the COVID-19 pandemic, banks’ profitability will be affected in the coming years. “Even once the global economy begins to recover from the current shock.”

According to the report titled ‘Global Financial Stability Report’ the lasting impact of the Covid-19 pandemic will and economic decline will “test banks’ resilience” as issues of loan losses and tighter margins from low-interest rates arise. In the report, the IMF stated that “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 report also showed bank earnings that have already been hit hard by the Covid-19 economic crisis. The KBW Bank Index, which tracks two dozen bank stocks in the United States plunged 39% year-to-date. While JPMorgan Chase reported a 69% drop in profit in the first quarter. The IMF expressed its concerns over the possible challenges that could emerge from bank earnings through 2025.

“Banks’ earnings challenges emerged prior to the recent Covid-19 episode and will extend to at least 2025, well beyond the immediate effects of the current situation,” as stated by the IMF, adding that banks will undergo some “structural” challenges in the coming years.

An example was cited by the IMF stating that “financial sector authorities should incorporate the potential impact of low-interest rates in their decisions and risk assessments. Supervisory capital planning and stress testing should include “lower-for-longer” scenarios, the strength of business models in such an environment should be evaluated. Supervisors should also remain vigilant and prevent any buildup of excessive risks that could reduce the banking sector’s resilience.”

In the report, it was stated that though banks could face a few challenges, they are better prepared for the coming economic shock compared to rising concerns by policymakers over households and businesses. According to the financial counselor of IMF Tobias Adrian, banks are going into the economic crisis with “a lot of capital and liquidity.” In his words, he described the economic crisis ad “very, very severe.”

Policymakers say a way out for banks is for them to stop issuing dividends and stock buybacks to preserve capital. In March, some major US banks agreed to stop buybacks through the second quarter of the year.

Adrian also said that stopping payouts would help banks “build up additional cushions against further adverse shocks.” Adding that if things turn out well eventually, the withheld capital can be paid out to shareholders in the future.