According to Tobias Adrian, Director of the Monetary and Capital Markets Department at the International Monetary Fund, Europe's banks have digested the rise in interest rates since 2022 well so far. „But there are also weak points,“ he says in an interview with Börsen-Zeitung. According to IMF, some institutions are showing low profitability, while others are notable for the low quality of their loan books. „There is a risk that such banks will quickly come under pressure in the event of external shocks,“ says Adrian. And there are signs that shocks could occur more frequently in the future, for example due to political tensions.

Higher interest rates are challenge for institutions heavily involved in commercial real estate financing, since the property sector is particularly sensitive to interest rats. The level of non-performing loans in the CRE sector is rising – particularly in the USA, but also in Europe.

The rapid rise in interest rates is also having a negative impact on government bond holdings. „Banks therefore have some problems on the assets side, but money is being made in the deposit business, which is reflected in higher market valuations,“ says Adrian. „This is very good for the resilience of banks.“

He emphasises that the resilience of a bank is not only dependent on the amount of regulatory capital. „Credit Suisse is an example where there was basically a lot of regulatory capital, but the market no longer had confidence in the business model,“ he says. „But confidence is as important as capital.“

This also distinguishes good bank management from bad management. A good manager thinks about what market reaction a wrong decision will trigger, whereas a bad one does not. And good regulation is no substitute for good management. Banks can be poorly managed even if they are well regulated, and meet regulatory requirements.

Adrian is critical of banking supervision in the USA and Switzerland. „In the US, it is debatable whether the collapse of Silicon Valley Bank and other regional institutions could have been prevented by stricter regulatory requirements,“ he says. „But it is undisputed that there were gaps in supervision.“

The supervisors definitely identified the key weaknesses in advance, for example risks concerning a rapid rise in interest rates, for example with regard to revaluations of the bond portfolio as well as with regard to the rapid withdrawal of deposits. „However, the supervisory authority failed to immediately sanction measures taken by banks that went in the wrong direction,“ he says. It did not make sufficient use of its instruments. The US regulator was too cautious. The situation was similar in Switzerland. Despite obvious structural problems, the supervisor failed to clearly request the bank to take certain steps.

According to Adrian, growing global government debt since 2008 could also cause turbulence. When interest rates were low, it made sense to have higher government debt. Then came the pandemic, when it made sense to increase debt in order to save the economy.

„As a result, we are now at a point where global debt is almost twice as high as it was 20 years ago,“ he says. „Debt is rising, but global growth is continuing to fall. If interest rates are higher than growth rates, then this is a problem for countries with high levels of debt. Everything is probably okay, but there are scenarios where high government debt could become very uncomfortable.“

For example, if risk premiums increase due to global political conflicts, or central banks have to raise interest rates due to new shocks, high debt becomes a risk to financial stability.

And the increasing political bloc formation is also a challenge for financial stability, beyond rising risk premiums. „Fragmentation has a strong negative impact on the efficiency of capital markets,“ Adrian explains. Liquidity could fall because of fragmentation. Shocks could be less easily absorbed in the future. „As a result, financial stability could be weaker,“ he concludes.