IMF warns that Brexit’s unpredictable outcome poses risk to global financial stability
The International Monetary Fund has warned that Brexit’s unpredictable outcome poses a risk to global financial stability at a time when it is already challenged by heavily-indebted US corporations, China’s credit bubble and weak European banks.
Warning that banks were likely to be the sector of the City hardest hit by Britain’s departure from the European Union, the IMF said the costs of doing business would rise and regulation would become more complex.
The half-yearly Global Financial Stability Report – one of the IMF’s two flagship reports – said the benefits of London as a global financial hub stemmed from economies of scale and its expertise across a range of industries.
While the IMF acknowledged that there was “significant uncertainty” about the outcome of the two years of article 50 negotiations, it added that “the challenges stemming from Brexit could undermine financial stability in ways that are difficult to estimate or predict at this juncture.”
The IMF also noted that there could be financial stability benefits if Europe had a less concentrated banking system. The Washington-based organisation said global financial stability had continued to improve, helped by a pick-up in economic growth.
But it expressed concerns about the ability of heavily-indebted US corporations safely to fund higher investment during a period of rising interest rates. It also warned that a tightening of policy from the Federal Reserve, America’s central bank, or rising protectionism could add to the vulnerability of exposed firms in the emerging world, raising their debts by between $130 and $230bn.
The IMF highlighted China as its biggest concern among emerging economies, noting that bank assets were now more than triple the size of its economy. “China faces mounting risks to financial stability as credit continues to rise rapidly,” it said.
It said the economic recovery in the eurozone would not be sufficient to solve the problems of its “persistently weak” banks.
“System-wide headwinds are a problem not only within countries but can also affect the profitability of large, systemically important banks in Europe. These institutions find it difficult to keep up with their global competitors, and in some cases this may be partly due to profitability problems in their home countries.”
