The IMF estimates that large international banks will cease to be profitable in 2025
The International Monetary Fund (IMF) estimates that most banks of the world’s largest economic powers are at risk of becoming unprofitable in 2025 due to the prospect of a low interest rate environment, together with the impact of the crisis caused by the Covid-19.
In a new chapter of its ‘Global Financial Stability Report’ published this Friday, the Fund has warned that profitability has been a “persistent challenge” for banks in most advanced economies since the 2008 financial crisis, by what the scenario that opens after this new crisis, this time generated by the Covid-19 pandemic, presents a new series of downside risks.
IMF economists have carried out an econometric model including the main banks of a group of nine developed countries, those belonging to the G7 plus Switzerland and Sweden. According to his forecasts, a “large part” of its banking sectors may be unable to generate profits above their cost of capital by 2025.
“The forecast for short-term bank profitability (2020 and 2021) will be negatively affected by the abrupt rise in credit costs due to the economic recession generated by the Covid-19 outbreak,” the IMF explained. “That squeeze on margins will likely persist and intensify because long-term rates have fallen as a result of accommodative monetary policy,” added the Washington-based institution.
It advocates increasing non-interest income, cutting costs, pulling new technologies … or incurring more risks
In this scenario, the agency has ensured that banks have the capacity to mitigate these pressures on their structural profitability by increasing non-interest income, cutting costs or taking advantage of new technologies. These measures will also help banks to better compete against fintech and non-bank financial intermediaries.
However, the IMF has also set its sights on the possibility that banks may decide to take more risks to try to increase their return. “The pressures on profitability in the medium term could induce banks to increase credit, maturity, liquidity or operations risks aggressive enough to plant the seeds of future problems,” he warned.
Thus, the IMF has recommended politicians and supervisors to deploy a “mix” of policies that preserve a balance between financial stability, maintaining the strength of financial institutions and supporting economic activity.
“Financial sector authorities should incorporate in their decisions and risk assessments the potential impact of the low interest rate environment on banks. Capital planning by supervisors and stress tests should include ‘lower for longer’ scenarios ‘[low rates for a long time, “has been prescribed by the body chaired by Kristalina Georgieva.