IMF: Banks Could Encounter Market, Credit Losses As COVID-19 Surfaces ‘Cracks’ In The Financial System

The International Monetary Fund (IMF) cautioned that COVID-19 has made “cracks” in the worldwide financial system known and “will likely” have financial institutions encounter market and credit losses that will put their reserves to the test. The organization warned that the possibility of a sustained and acute slump will test firms, even though banks have amassed formidable liquidity and capital buffers while having successful stress tests as of the financial crisis of 2007 to 2009, Reuters reported.

The IMF wrote in a Global Financial Stability Report that “this crisis presents a very serious threat to the stability of the global financial system.” Wells Fargo and JPMorgan Chase & Co had noted before the release that quarterly profits dropped precipitously as the companies stashed billions to get ready for possibly large quantities of loans in default. 

The IMF also pointed out emerging stress in the U.S. commercial real estate space while tenants grapple with landlord payments were a point of possible pressure for some financial institutions. Firms have also been drawing down on credit lines, making banks reduce part of their liquidity buffers.

A drop in the prices for oil could also likely bring about credit losses when it comes to energy lenders, and financial institutions could also have losses on loans to households facing difficulty. 

As it stands, steps to control the proliferation of the coronavirus have removed trillions off of the worldwide stock markets, put 16 million in the U.S. out of work and may bring about the most severe economic downturn as of the Great Depression.

And, in separate news, the IMF has reduced growth forecasts in all major economies in addition to the majority of emerging countries in its new World Economic Outlook. Low-income countries in Latin America, Asia and Africa will be particularly hard hit. The worldwide economy is predicted to slump 3 percent this year.

In addition, the IMF also noted that U.S. unemployment is forecasted to reach 10.4 percent this year and 9.1 percent next year. And the IMF forecast for worldwide GDP growth next year will be 5.8 percent.