Eight years on from the 2008 financial crisis, more than a quarter of all banks in advanced economies are still weak and at risk of further instability, the International Monetary Fund said.
The banks, with combined assets of around $11.7 trillion (£9.2 trillion), face challenges to their business models from low rates and low economic growth
“Weak profitability could erode banks’ buffers over time and undermine their ability to support growth,” the IMF said in its October report on financial stability.
“This report finds that a cyclical recovery will not resolve the problem of low profitability,” the IMF said.
A negative feedback loop is developing. Low growth and low interest rates have squeezed the banks’ margins, making it harder for them boost the economy with debt and investments. This acts as a curb on economic activity, which is stoking popularity for nationalist political parties.
The political uncertainty is further curbing investment, meaning central banks have to keep interest rates lower for longer in the hope that credit flows around the system, further weakening banks’ business models.
Here is the IMF (emphasis ours):
“The political climate is unsettled in many countries. A lack of income growth and a rise in inequality have opened the door for populist, inward-looking policies.”
“These developments make it even harder to tackle legacy problems, further expose economies and markets to shocks, and raise the risk of a gradual slide into economic and financial stagnation. In such a state, financial institutions struggle to sustain healthy balance sheets, which weakens economic growth and financial stability.”
And here are the charts on policy uncertainty: