IMF: banks’ profit not hurt by inflation, rate hike

International Monetary Fund (IMF) has said the banking systems and profitability are largely insulated from inflation and increase in interest rates in both advanced and emerging economies.

In a report released at the weekend, titled: “Rising Rates May Trigger Financial Instability, Complicating Fight Against Inflation”, the Fund said that vulnerabilities at some banks could lead to tradeoffs between containing inflation and protecting financial stability.

The IMF said findings on the relationship between inflation and bank profitability showed that most banks are largely insulated from shifts in inflation as the exposure of income and expenses tend to offset each other.

It however, added that some banks have significant inflation exposures, which may lead to financial instability if concentrated losses lead to wider panics in the banking sector.

“As several major central banks are reassessing their monetary policy frameworks in the aftermath of the post-pandemic inflation surge, a deeper understanding of the links between inflation and bank profitability can help design better monetary policy frameworks. Our findings imply that central banks may need to consider financial stability when setting their policy stance to combat inflation,” the IMF said.

“Does inflation matter for bank profitability? This question has received surprisingly little attention. We answer it by combining balance sheet and income data for more than 6,600 banks in advanced and emerging economies with nearly three decades of IMF economic data,” it said.

The IMF said most lenders appear largely hedged against inflation with both bank income and expenses rising with inflation to similar degrees.

It said that income and expenses tied to borrowing and lending are exposed indirectly to inflation, because they primarily react to policy rates that fluctuate in response to inflation. In contrast, other income and expenses—revenues from non-traditional banking activities, services, salaries, and rent—are exposed directly to price changes.

It explained that at the country level, the impact of inflation on bank income and expenses individually varies widely across banking systems.