“Hardening of government bond yields in the face of additional borrowing could result in mark-to-market losses for banks,” the central bank said in its Financial Stability Report.
If banks’ appetite to hold sovereign debt diminishes in such a scenario, it could trigger negative feedback.
“This could potentially reduce their lending and adversely affect overall economic activity, especially in countries with high fiscal vulnerability and less capitalised banking systems,” said the report.
With the sovereign credit outlook deteriorating in several emerging markets, the relationship between sovereign debt holdings and bank balance sheets poses risks to macro-financial stability.
During the three-month period, the benchmark bond yields surged as much as 76 basis points to a high of 7.60% on June 13. One basis point is 0.01%.
When yields rise, prices fall. The benchmark bond yielded 7.45% Thursday.
The report cited IMF recommended policy response to mitigate risk. Those include preserving bank capital resources to absorb losses and conducting bank stress tests.
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