Higher rates exposing financial fragilities: Fitch

Tighter financial conditions are still threatening to expose vulnerabilities that accumulated when interest rates were ultra low, says Fitch Ratings.

In a new report, the rating agency said 20 markets are facing moderate or high stresses on their banking systems and overall economies.

According to the report, while most of the banking sectors in the developed markets are positioned to weather higher interest rates, recent U.S. bank failures demonstrate how rapid monetary tightening can crystallize risks.

“Other pockets of vulnerability are likely to be tested, which could trigger wider financial stress,” it said.

From a historical perspective, the share of global markets facing elevated stress is low, but this reflects a lack of stress signals in emerging markets, it noted.

“[Emerging market] policymakers provided less stimulus during the Covid-19 shock and many raised interest rates early in the recovery, which may have tempered any build-up in credit bubbles,” Fitch said.

Looking ahead, the agency is forecasting that credit will continue shrinking in 2023, due to ongoing monetary tightening.

While this will curb risks from above-trend credit growth, “we still expect episodes of financial distress associated with credit contraction,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.