WASHINGTON: The recent banking turmoil in the United States (US) and Europe could spread to vital nonbank institutions such as pension funds, further complicating central banks’ struggle against high inflation, the International Monetary Fund (IMF) warned Tuesday.
IMF economists wrote in a blog post that banking risks could increase in coming months in times of the continued tightening of monetary policy worldwide and spread to the nonbank sector, which now holds nearly half of all global financial assets.
The analysis was published alongside a chapter from the lending body’s biannual report on global economic stability.
On both sides of the Atlantic, the central banks have been walking a fine line as they try to deal with high inflation by raising interest rates without adding to the crisis in the banking sector sparked by the surprising collapse of Silicon Valley Bank.
The Californian high-tech bank collapsed after it took on excessive interest-rate risk, which made it over-exposed when the US Federal Reserve started its aggressive drive of interest-rate hikes last year.
Nonbank financial intermediaries such as pension and investment funds have grown dramatically since the 2008 world financial crisis when regulators started to toughen up the rules on banks.
IMF on NBFIs
NBFIs are deeply interconnected with traditional banks and can become a big amplification channel of economic stress, the IMF said.
The sheer size of the NBFI sector meant the smooth working of the nonbank sector was crucial for economic stability, IMF economists wrote.
To correctly address the issue, the IMF said policymakers should use a range of tools, including starting more robust surveillance and regulation of the sector and compelling companies and firms to share more data about the risks they are taking.
