IMF Global Financial Stability Report and US Banking Industry
Editor's Note: The author is Dr Mehmood Ul Hassan Khan, Executive Director of the Center for South Asia & International Studies (CSAIS) Islamabad and Regional Expert on China, BRI & CPEC. The article reflects the author's opinions and not necessarily the views of Gwadar Pro.
The latest Global Financial Stability Report (GFSR) released by the International Monetary Fund (IMF) has warned about the risks in the global economy, particularly the fragility of the US banking system. This fragility has had numerous spillover effects on socio-economic and financial stability, leading to a decrease in global GDP growth.
The report suggests that the US banking system has been further eroded by the irrational fiscal and monetary policies of its financial regulators, particularly the Federal Reserve System. The constant hikes in interest rates have had negative impacts on the domestic, regional, and international banking and financial systems, hindering investment and business activities. The IMF report exposes the deepening flaws in the banking industry of the US, which has led to a lack of trust among depositors in banking industry bosses and regulators.
The closure of Silicon Valley Bank (SVB) and Signature Bank, and the strict supervision of other banks by US financial departments and regulators, have created panic among common depositors. As a result, clients have started withdrawing their hard-earned funds from these banks, which has undermined their solvency. This has affected market confidence and triggered significant emergency responses by the authorities. The 25 biggest banks in the country garnered $120 billion in deposits following the collapses and subsequent rescues federal regulators announced on March 12 while deposits at smaller banks fell by $108 billion, as per The Wall Street Journal.
The report also suggests that the US economy could enter a recessionary phase in 2023, which could reduce lending from regional and community banks, leading to a contraction inching towards a downturn in the economy. The IMF forecasts in its latest World Economic Outlook that the US economy will expand 1.6 percent this year, down from 2.1 percent in 2022, and the global economy is predicted to grow 2.8 in 2023, down from 3.4 percent in 2022. These predictions are not good signs for global economic recovery, and financial stability could be at higher risks if the US economy enters a recessionary phase.
Critical analysis suggests that US banks' lending capacity will decline by 1% in 2023 due to falling bank stock values. The decline in lending by regional and smaller banks could impact economic growth and financial stability, as they account for more than one-third of total bank lending. Recession concerns and worries about high inflation pose significant risks to the US banking and finance sectors, which could spread to the broader economy and hurt business and consumer confidence.
The US banking and finance sector's structural flaws have created numerous faulty lines for both its own country and global economic growth. Financial market volatility and prevailing shadow banking have widened the elements of uncertainty, leaving the financial sector unsettled. Unfortunately, the US bank's failure has also affected the Pakistani banking industry, leading to further non-performing loans and poor credit underwriting.
To address these issues, US policymakers and financial regulators should amend their inappropriate policies and fix flaws through focused apparatus. Monetary policy should focus on price stability to keep inflation expectations in check. The US policymakers should strive to bring down inflation while avoiding a recession and maintaining financial stability.