Higher interest rates that reduce debt affordability will increase banks' asset risk, but rising rates are a plus for many banks’ net interest margins and profitability. 

» In non-bank finance, insurers, and asset managers the implications are mixed, but high inflation is generally credit negative. 

Measures of inflation across most of the world will remain high in 2022, particularly if the sharp spike in energy and other commodity prices amid heightened geopolitical tensions is sustained, according to Moody's Investors Service. For many financial institutions, though modest inflation 

provides an initial incremental earnings benefit following a period when interest rates are low, as they generally have been since the 2007-08 financial crisis, risks will outweigh benefits for most in a more pronounced and persistent inflationary environment. 

“For banks, experience with inflation has encouraged prudent balance sheet management in many emerging markets, but inflation still has some correlation with rising credit costs,” according to Moody's Senior Vice President Allen Tischler. “Developed market banks will likely benefit from regulatory stress testing and scenario analysis, though risk-management missteps may be exposed if there are monetary policy surprises.” 

Residential mortgage lenders and non-prime consumer lenders are most vulnerable in an inflationary environment. Commercial real estate lenders and business development companies will benefit from floating rate portfolios, but they, along with aircraft lessors and auto captives, face the prospect of lower loan demand and reduced borrower credit quality. 

The Moody's report provides detail on how a significant rise in interest rates and high inflation has important consequences for insurers and asset managers across the globe.