American and European banking risks may intensify as monetary tightening continues at central banks, the International Monetary Fund (IMF) said Tuesday. “Recent strains at some banks in the United States and Europe are a powerful reminder of pockets of elevated financial vulnerabilities built over years of low rates, compressed volatility, and ample liquidity,” it said in a statement. “Such risks could intensify in coming months amid the continued tightening of monetary policy globally, making it especially important to understand and safeguard this broad swath of the financial sector that comprises an array of institutions beyond banks,” it added. The agency said central banks injecting liquidity for financial stability purposes could complicate the fight against high inflation. “Amid high inflation, however, challenging tradeoffs may emerge for central banks between fostering financial stability and achieving price stability during periods of stress that may threaten the health of the financial system,” it said. In a low inflation environment, on the other hand, central banks can respond to financial stress by easing monetary policies, such as cutting interest rates or purchasing assets to restore functioning in the market, according to the IMF.
Source: Anadolu Agency – English