With the Coron a v i r u s (Covid-19) triggering a record pace of corporate bond defaults across the world, the International Monetary Fund (IMF) is warning that the development could pose a test for banks’ resilience. “There are now many economies with high levels of debt that are expected to face an extremely sharp economic slowdown. This deterioration in economic fundamentals has already led to the highest pace of corporate bond defaults since the global financial crisis, and there is a risk of a broader impact on the solvency of companies and households. Insolvencies will test the resilience of the banking sector,” the IMF said yesterday in its updated Global Financial Stability report. Noting that banks had entered the Coronavirus crisis with higher liquidity and capital buffers as a result of post-crisis reforms, the fund said some of the financial institutions had already started to provision more for expected losses on their loans, as evidenced in their first quarter earnings reports, adding that “this is likely to continue as banks assess the ability of borrowers to repay their loans, while also accounting for the support that governments have given households and companies.” The IMF also warned that non-bank financial companies could also face shocks in the event of a broad wave of insolvencies. “These companies could also act as an amplifier of this stress. For example, a substantial shock to asset prices could lead to further outflows from investment funds, which could, in turn, trigger fire sales from those fund managers that would exacerbate market pressures,” the fund stated.
