IMF calls for stricter stress tests and heightened scrutiny on banks

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IMF calls for stricter stress tests and heightened scrutiny on banks

The International Monetary Fund (IMF) on Tuesday urged global regulators to impose stricter stress tests and heightened scrutiny on banks, including smaller ones, in an effort to minimize sector vulnerabilities. The call comes as banks grapple with falling loan demand and rising funding costs, despite effectively navigating the high interest-rate environment.

In its 2023 Global Financial Stability Report, the IMF underlined the systemic risks stemming from weak banks. The report cited the collapse of several lenders such as Silicon Valley Bank in the US and Credit Suisse (SIX: CSGN ) Group AG in Europe in March 2023. Notably, Credit Suisse Group AG, a global systemically important bank (G-SIB), was taken over with the support of Swiss authorities.

The IMF's recommendations include enhancing risk assessments, conducting more frequent examinations, and creating crisis management frameworks. The institution also advised regulators to make stress tests more stringent and raise capital standards for interest-rate risk.

In response to these recommendations, US officials are considering changes to the Federal Reserve’s annual stress tests and a significant increase in capital requirements for Wall Street's biggest banks. This proposal has met with resistance from the industry.

The IMF also encouraged central banks to persistently combat inflation until there is tangible evidence of sustainable movement towards targets. This recommendation underscores the IMF's commitment to maintaining global financial stability amid turbulent economic conditions.

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