A resilient global banking sector

The International Monetary Fund carried out a Global Bank Stress Test to assess the resilience of the banking sector in the event of a severe stagflation scenario. The results were released in its latest Global Financial Stability report from October. In aggregate, the global banking system has sufficient capital to absorb losses benefiting from the reforms since the global financial crisis and the build-up of capital over the past years (Global CET1 capital ratio increased from 12.5% in 2019 to 14.1% in 2021).

Key highlights:

• Assumptions of The Global Bank Stress Test: a pandemic resurgence and continuation of geopolitical tensions that result in persistent disruptions in the global supply chain, including disruption in Russian gas exports to Europe.
• Results of the Stress test: The Global bank CET1 capital ratio declines from 14.1% in 2021 to a minimum of 11.4% in 2023, barely recovering to 11.5% in 2024.
  - No country banking system would fail to meet the minimum regulatory 4.5% CET1, although several individual institutions would, of which the majority are emerging market banks, representing 29% of emerging market bank assets.
  - Among GSIBs, no bank would fall below the minimum threshold, although 11% (by bank assets) would need to dip into their capital conservation buffers (CCBs).
  - The overall capital need under the stress test scenario would amount to about $214 billion.