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While banking system stress looks low generally, rising interest rates around the world will expose any vulnerabilities that have developed, says Fitch Ratings.

In a new report, the rating agency said that its current assessments of potential systemic stress — due to housing or equity market bubbles — indicate that the number of countries facing stress in their banking sectors is low by historical standards.

Currently, about 20% of the markets Fitch reviews are considered to have “moderate or high” vulnerability, which is well below the peak during the global financial crisis, and also below the historical average of 40%.

“Global monetary tightening will be a test of any macro-prudential vulnerabilities that may have built up during the long period of ultra-low interest rates,” Fitch warned. However, the report noted that the shift to higher rates doesn’t appear to be coming amid a buildup in weaknesses due to very low rates.

For instance, in markets with elevated real estate prices, “Above-trend house prices have not necessarily been accompanied by increased leverage, which should limit damage from potential price corrections,” Fitch said.

“But the economic impact of financial vulnerabilities combined with high inflation will depend on how high interest rates rise and how asset prices and debt-servicing burdens respond,” it said.

Two thirds of the banking systems that carry elevated vulnerabilities are in developed markets, while only one third are in emerging markets, it noted.

The number of vulnerable markets is elevated from pre-pandemic levels, but is unchanged from last year, Fitch reported, “partly because last year’s economic recoveries reversed much of the jump in credit-to-GDP ratios caused by economic contractions during the Covid-19 pandemic.”