The IMF has recommended that countries overcoming the pandemic should maintain restrictions on capital distributions. According to the IMF, where it becomes necessary, such restriction could be relaxed only progressively subject to supervisory stress tests. This according to the Fund will ensure that banks remain well-capitalized. The IMF revealed this in its latest April 2021 Edition of the Global Financial Stability Report released on Tuesday, April 6, 2021.
The IMF noted that extraordinary policy measures have eased financial conditions and supported economies. This, according to the Fund, is helping to contain financial stability risks. Meanwhile, the IMF warned that the credit quality of hard-hit borrowers and the profitability outlook are likely to weigh on the risk appetite of banks during the recovery. capital distributions capital distributions capital distributions
“There is a pressing need to act to avoid a legacy of vulnerabilities. Policymakers should take early action and tighten selected macro prudential policy tools while avoiding a broad tightening of financial conditions. They should also support balance sheet repair to foster a sustainable and inclusive recovery”.
Great impact from policy supports
The IMF has underscored that massive policy support has ensured that the global financial system remains resilient during the COVID-19 pandemic. It noted that financial conditions have eased significantly as a result.
“This has helped maintain the flow of credit to households and firms, facilitated the recovery, and kept financial risks at bay. The improved economic outlook has clearly reduced the range of adverse outcomes”.
The Fund further stated that excessive risk-taking in markets is contributing to stretched valuations, and rising financial vulnerabilities. The IMF indicated that this may become structural legacy problems if not addressed.
Meanwhile, the IMF noted that Equity markets have rallied aggressively since the third quarter of 2020 on expectations of a rapid economic recovery and continued policy backstops. It noted that they are now trading at levels meaningfully higher than those suggested by models based on fundamentals.
The recent outlook by the IMF shows signs of a rebound in the global economy. However, the Fund indicated that some countries are still vulnerable at this time.
“Countries with weaker fundamentals or limited access to COVID-19 vaccines are vulnerable. The sovereign-bank nexus has worsened in emerging markets as domestic banks have absorbed the bulk of increases in domestic debt”.
Furthermore, the report states that funding conditions for capital instruments have tightened for weaker, smaller banks. As such, National authorities face a delicate but urgent challenge in unwinding implicit guarantees. According to the report, this is a task that countries must handle delicately given the potential for disorderly repricing.
Banks remain resilient
The IMF noted that Banks came into the pandemic with high capital and liquidity buffers due to regulatory reforms implemented after the 2007–08 financial crisis. It however questions the extent to which they will continue to provide credit through the recovery.
The report reveals that the growth of loans, particularly to businesses, has slowed in some countries. However, there are hopes that loan demand will firm up once the recovery gains strength, especially where it has been weakest.
“But loan officers in most countries do not anticipate a loosening in lending standards. The phasing out of support policies could have a significant impact on some banks, likely weighing on their appetite for lending. Moreover, for most banks, uncertainties about credit losses and weak prospects for profitability are likely to discourage significant reduction in capital buffers to support the recovery. Such constraints may be particularly worrisome for firms with limited financing options that are more dependent on bank credit”.
The IMF calls on authorities to continue to encourage banks to use buffers, where prudent, to support the recovery. It added that ongoing policy support remains essential until a sustainable and inclusive recovery takes hold to maintain the flow of credit to the economy. This will prevent the pandemic from posing a threat to the global financial system.
Also, the Fund calls for Monetary policy to remain accommodative until mandated policy objectives are achieved. It encouraged policymakers to act swiftly to prevent financial vulnerabilities from becoming entrenched and turning into a legacy problem.