In October 2016, the International Monetary Fund said that medium-term risks to financial sector stability are rising as the global economy enters a new era, characterized by chronic weak growth, prolonged low interest rates and growing political uncertainty.
Financial stability now depends on how well banks adapt to this new era. Economic growth by itself will not be enough to resolve the problem of weak banks, especially in Europe, where the IMF says that one-third of the banking system is at risk.
“Our priority must be to emerge from this prolonged environment of low growth, low inflation, and low interest rates”
Christine Lagarde, Managing Director, IMF
Policymakers in search of possible solutions could do worse than look at the Mediterranean island of Cyprus, where it took authorities just three years to take the banking sector from intensive care into recovery.
A completely restructured financial system, led by a recapitalized Bank of Cyprus, is now once again making a significant contribution to the country’s economic growth.
As well as regulation, financial innovation will have a major part to play in putting today’s banks back on the path to growth. “My hope is that banks will be less busy with new regulatory issues, and more dedicated to their clients, more focused on their core activities, and more busy exploiting new financial technologies,” says Jaime Caruana, general manager of the Bank for International Settlements
