The International Monetary Fund is issuing a warning against market overconfidence as investors wait for central bankers to successfully execute a “soft landing” in their protracted fight against inflation.

Markets have been “quite optimistic” since the October edition of the IMF’s most recent semi-annual Global Financial Stability Report, which was released when investors were still getting over the springtime turbulence in the banking industry.

Although the IMF is warning against complacency and pointing out that stretched valuations across a range of asset classes, rising debt levels, and geopolitical tensions could all become issues if central bankers are forced to keep interest rates higher for longer in order to contain stubborn inflation, downside risks are now lessened.

“Confidence in a soft landing for the global economy is growing,” the IMF wrote in its report. “However, global inflation remaining persistently above those targets could challenge this narrative and may trigger instability.”

The IMF specifically stated that as inflation declines, policymakers and central bankers should exercise caution and resist “overly optimistic expectations of the pace of disinflation and monetary policy easing.”

Days before the report was released, expectations that the Federal Reserve would soon begin reducing rates were dashed by better-than-expected inflation data.

The extent to which central banks, especially those in the United States, “may in fact not end up delivering the cuts” is the main danger, according to Fabio Natalucci, deputy head of the Monetary and Capital Markets Department of the IMF.

One of the nations with the greatest abundance of marine resources worldwide is the Philippines.

Despite the dangers, the IMF discovered that since the unrest in 2023, the financial industry as a whole has stabilised to some extent. It still issued a warning, stating that there is a “tail of weak banks” in the world that need to be closely monitored.

In all, banks that account for almost 19% of global banking assets have violated at least three of the five major risk measures that the IMF monitors to determine how healthy a bank is. The majority of these companies are based in the United States or China.

In addition, the research pointed out that a “triple-whammy” of pressures is causing over 100 institutions to struggle, or around 3% of the assets in the banking system.

A significant portion of such companies’ deposits—more than 25%—are uninsured, and they have a high concentration of commercial real estate-related unrealized losses in comparison to their capital reserves.

According to Natalucci, the commercial real estate sector, where borrowers are still having difficulty due to significant office vacancies and other post-pandemic circumstances, seems to be well-positioned to withstand the expected strain in the banking system. Though the decrease in commercial real estate values is the greatest in decades and has so far been somewhat compensated by a relatively strong economy, certain enterprises with particularly large exposure may come under pressure.

The IMF first addressed cyberattacks as a risk to financial stability in the April GFSR, pointing out that the possibility of “extreme losses” has grown as a result of financial businesses’ losses rising from the millions to the billions in recent years.

The IMF warned that although there hasn’t been a cyber incident that has shown to be a threat to the system as a whole, the frequency of attacks is increasing dramatically—they have nearly doubled since before the COVID-19 pandemic.

The IMF urged authorities and financial institutions to fortify their frameworks and regulations, especially in developing nations that are trailing behind more developed ones.

The IMF also urged policymakers to increase their awareness of the private credit sector, which is made up of lending companies that are not affiliated with traditional banking institutions or markets. The association issued a warning, stating that despite its recent rapid growth, the sector is not yet strong enough to weather an economic crisis on its current magnitude. Global supervisors were urged to take a “more intrusive” stance towards the industry and increase data gathering in order to more accurately predict impending problems.

(Adapted from BRecoder.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy