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Home / Business News / IMF warns banks against taking excessive risks due to low rates

IMF warns banks against taking excessive risks due to low rates

Bank profitability likely will be under pressure for the next five years, based on a simulation of nine advanced economies, the Washington-based lender said in an analytical chapter released on Friday.

business Updated: May 22, 2020 18:16 IST
Bloomberg | Posted by Harshita Singh
Bloomberg | Posted by Harshita Singh
Bloomberg
The International Monetary Fund logo is seen during the IMF/World Bank meetings in Washington, US.
The International Monetary Fund logo is seen during the IMF/World Bank meetings in Washington, US. (REUTERS)

The International Monetary Fund is warning banks against taking on excessive risks to offset the reduced profitability that results from low interest rates once economies begin to recover from the global pandemic.

Bank profitability likely will be under pressure for the next five years, based on a simulation of nine advanced economies, the Washington-based lender said in an analytical chapter released on Friday as a follow-up to its Financial Stability Report published last month. While cost cutting and higher fee income should help, they’re unlikely to fully relieve the pressure, the IMF said.

“Looking ahead, there is a danger that profitability challenges could induce banks to take on excessive risks once the economy fully recovers,” the IMF said.

The IMF encouraged financial-sector authorities to incorporate low interest rates into their decisions and risk assessments. The fund said that policy makers will need to strike the right balance between policies that preserve financial stability, maintain the soundness of institutions and support economic growth.

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