Approximately 5% of global banks are at risk of facing stress if central bank interest rates remain elevated for an extended period, despite recent improvements in the sector, according to the international monetary fund (imf). in its semi-annual global financial stability report, the imf also highlighted that an additional 30% of banks, including some of the world's largest, would be vulnerable in the event of a low-growth, high-inflation scenario known as "stagflation." the imf arrived at these conclusions after subjecting around 900 lenders from 29 countries to a rigorous global stress test, which was implemented following the collapse of silicon valley bank, credit suisse group, and two other us lenders earlier this year. tobias adrian, the director of the imf's monetary and capital markets department, acknowledged the existence of financially weak banks in many countries. however, he made these remarks before the recent acts of aggression involving hamas and retaliatory airstrikes in the gaza strip. the imf modified this year's stress test to assess the potential impact of higher interest rates, as well as the possibility of consumers withdrawing their deposits. in its "severe-but-plausible" scenario, the imf envisions the global economy entering a period of "stagflation." under the baseline scenario, approximately 5% of banks displayed relative weaknesses in terms of capital, with this figure rising to 30% or potentially even higher during times of severe stress. although the imf did not disclose the specific banks that might encounter challenges under these economic circumstances, it emphasized that both small and large lenders were included. adrian acknowledged the potential pressure faced by certain prominent institutions in various scenarios, drawing attention to how even the failure of smaller banks can undermine financial stability, as evidenced by the recent banking crisis in the united states. the imf stressed the urgent need for governments to adopt proactive supervision of their banks and for examiners to adopt a more intrusive approach. it also called for timely and decisive corrective action by direct lenders and emphasized the importance of enhancing bank resilience through increased capital levels. the release of this report coincided with the convening of global financial leaders in marrakech, morocco, for the annual meetings of the imf and world bank. regarding the battle against inflation, tobias adrian informed reporters during a briefing on tuesday that recent developments in government bond markets have been relatively orderly. he noted that while bond yields have risen rapidly, there has been no evidence of forced deleveraging or other market dysfunctions. adrian also emphasized that the difference in bond yields between german government bonds and those of southern european countries, such as italy, which experienced significant strain during the sovereign debt crisis a decade ago, remains well contained. the interest rate hikes implemented by the us federal reserve in 2022 and 2023 resulted in substantial losses on the government bond portfolios held by regional us banks, causing depositors to become apprehensive and leading to a series of failures in march and early may of this year. last month, the us central bank maintained its benchmark overnight interest rate within the range of 5.25%-5.50%. however, it indicated that another quarter-percentage-point hike would likely be required before the end of the year to solidify the downward trajectory of inflation. furthermore, the policy rate is anticipated to surpass 5% by the end of 2024. banks were classified as weak if their capital levels declined by more than five percentage points during the imf's stress test or fell below a threshold of 7%. according to the baseline scenario, 55 banks, representing 4% of global assets, demonstrated weakness. in the stagflation scenario, this number expanded to 215 banks, holding 42% of assets. the report called on central banks to maintain higher interest rates until inflation subsides. however, it cautioned against premature easing of monetary policy, highlighting that some investors may be overly confident in the quick decline of inflation. the report concluded with a reminder that history teaches us to avoid prematurely declaring victory and easing monetary policy.