- The IMF warned of bond market risks amid fears of a Silicon Valley Bank repeat.
- Stricter lender scrutiny is necessary, the IMF's Tobias Adrian told the Financial Times.
The sharp rise in Treasury bond yields provoked warnings from the International Monetary Fund, which called on regulators to increase their financial markets oversight.
"When you see large moves that are very fast, it has more potential to trigger instability, because market participants have to reposition, and there are these accelerators in the system that could kick in," Tobias Adrian, who heads the IMF's monetary and capital markets department, told the Financial Times.
The warning comes after Treasury yields hit highs not seen in nearly two decades, amid one of history's most extreme US bond sell-offs.
When yields rise, bond prices fall, which has already been known to set off banking turmoil. In March, Silicon Valley Bank was forced to sell its bond holdings at a major loss, sparking a flight in deposits that triggered its collapse along with other lenders.
Though significantly wider credit spreads are yet to be seen from today's bond retreat, it could happen at some point, Adrian said.
Part of this year's banking failures resulted from lax management and institutional unpreparedness for higher interest rates. It's for this reason that Adrian encouraged tougher financial scrutiny.
"Forceful supervisory action can really make a difference," he said.
US regulators have proposed tighter capital rules for the biggest lenders. While bank executives are opposed to these ideas, the Federal Reserve Vice Chair for Supervision Michael Barr recently defended the plan, saying it would limit the risks faced by lenders.
"This may result in higher funding costs," he said at the American Bankers Association on Monday. "But this is only half the story. Capital also enables banks to absorb more losses without risking their ability to repay their creditors."
According to a Tuesday report from the IMF, inaction could be consequential, as around 42% of the world's banking assets would be affected if a global recession was to take hold. That's as 215 institutions would be at increased risk.
"The global stress test shows a wide set of banks will suffer capital losses under an adverse stagflationary scenario, including several systemically important institutions in China, Europe, and the United States," it wrote.