Global banking is a bright spot

The world's financial system faces an intimidating set of but the lessons of GFC are holding banks in challenges, good stead

- TT RAM MOHAN

The Ukraine conflict poses the biggest challenge to growth since the global financial crisis (GFC) of 2007. The world economy will grow at 3.2 per cent in 2022 and 2.7 per cent in 2023, says the International Monetary Fund (IMF). Growth in 2023 will be the lowest since 2010, leaving aside the pandemic year of 2020.

Slow growth and rising interest rates are bad for banks. Slower growth spells an increase in bad loans. Rising interest rates translate into losses in the bond market

The astonishing thing is that it appears that the global banking system does not face any high risk of collapse even in these trying times.

There is thus hope that the global economy can get back to normal after 2023. Assuming that we escape nuclear annihilation.

The world's financial system faces an intimidating set of challenges, apart from slowing growth and rising interest rates. The IMF's Global Financial Stability Report (GFSR, October 2022) lists these challenges: China's housing market woes: Stringent lockdowns in China have impacted home sales. Buyers do not want to make advance payments for the purchase of properties.

As a result, developers face liquidity pressures and many have gone bankrupt. Banks' exposure to the property is 28 per cent of total loans. (In India, a bank exposure of more than 10 per cent to the property market is considered risky). The IMF estimates that, in a sample of Chinese banks it looked at, 15 per cent (mostly small banks), could fail to meet the minimum capital requirement.

Poor market liquidity: Central banks are tightening monetary policy and shrinking their balance sheets.

This has meant less liquidity in the market. Investors would like to sell securities when interest rates rise.