According to a recent study by the International Monetary Fund (IMF) on the connection between inflation and bank profitability, most banks are relatively immune to changes in inflation since their exposure to income and expenses tends to balance each other out.
However, it stated that some are very vulnerable to inflation, which might cause financial instability if concentrated losses trigger broader panics in the banking industry.
A fuller understanding of the connections between inflation and bank profitability can aid in the construction of better monetary policy frameworks, according to the Fund, as several major central banks are reevaluating their monetary policy frameworks in the wake of the post-pandemic inflation increase.
“Our findings imply that central banks may need to consider financial stability when setting their policy stance to combat inflation,” the fund said.
Tightening monetary policy, while important, might result in significant losses for banks with significant exposures in the face of excessive inflation, according to some studies.
This could result in panics and financial instability as investors and customers reevaluate the risks associated with all banks.
“Strengthening prudential regulation and supervision, heightening required risk management at banks, improving transparency, and using granular risk assessments accounting for key factors our research highlights for a broad set of banks would all help to systematically contain inflation exposures,” it said.
Despite these achievements, central banks may need to strike a compromise between the risk of financial instability and boosting rates to control inflation if losses at individual banks provide space for broader contagion, according to the IMF.
Source: newsthemegh.com