WASHINGTON – The defeated banking sector will remain under pressure until 2025, even as the economy recovers, the International Monetary Fund announced on Friday.
In its latest Global Financial Stability Report, the IMF found that banks in nine advanced economies would struggle to generate profits over the next five years as the coronavirus pandemic caused a sustained period of low interest rates. The fund said the economic downturn in Covid-19 would “test the resilience of banks”
“The main pressure for profitability is likely to continue in the medium and long term, even as the global economy begins to recover from the current shock,” the IMF said.
Banks’ incomes have already been hit hard by the economic shock of the pandemic. JPMorgan Chase, for example, reported a 69% drop in first-quarter profits from a year earlier. The KBW banking index, which tracks two dozen U.S. banking stocks, has fallen to 39 percent year-on-year.
“The income challenges for banks arose before the recent episode of Covid-19 and will continue at least until 2025, far beyond the immediate effects of the current situation,” the IMF said.
The report says banks are better prepared for this economic shock thanks to buffers introduced after the financial crisis, but some politicians say more needs to be done to protect households and businesses.
“Banks are falling into this crisis with a lot of capital and liquidity,” Tobias Adrian, an IMF financial adviser, told CNBC. “Having said that, this is a very, very severe economic crisis.”
One solution, according to politicians, is for banks to stop issuing dividends and repurchasing shares to save capital. Major US banks agreed in March to suspend redemptions in the second quarter of the year, but many continued to pay dividends.
“By stopping payments, it helps build extra cushions against further adverse shocks,” Adrian said. “If all goes well, this is capital that can be paid back to shareholders in the future.”