Incomplete policy actions and inadequate reforms of the banking sector have
left segments of the global banking system vulnerable to further shocks,
according to the International Monetary Fund (IMF). Many institutions - - particularly
weaker European banks -- are caught in a maelstrom of interlinked pressures that
are intensifying risks for the system as a whole
The Fund says the quantity and quality of capital has improved but progress has
been uneven, with European banks generally lagging US banks. European banks
have also made less progress in lengthening the maturity of their funding, and
remain highly dependent on wholesale funding, with second-tier banks
increasingly reliant on covered bond markets and the European Central Bank (ECB)
for funding. Banks are also facing pressures on the asset side of their balance
sheet, reflecting concerns about exposures to troubled sovereigns and to
property markets in Ireland, Spain, the United Kingdom, and the United States.
Policymakers have to strike the right balance and shift their focus
away from policies that were put in place to treat the symptoms of
the crisis toward measures that will treat the underlying causes.
The challenge will be to repair the banking system and deal with
high debt levels without jeopardizing financial stability and the
nascent global economic recovery.
“The legacy of high debt
burdens is weighing on economic activity and balance sheets, keeping
risks to financial stability elevated,” said José Viñals,
Financial Counsellor and head of the IMF’s Monetary and Capital
Global Financial Stability Report gives policymakers a roadmap
to focus their work on several fronts.
Reduce high government debt burdens
andstrengthen balance sheets
Clean banks’ balance sheets
bad assets and increasing capital
Write down distressed mortgage loans and
reduce principal on mortgages that could benefit from
Guard against overheating and the buildup
of financial imbalances in emerging economies
The two-speed economic recovery—with advanced economies slowly
gaining strength while emerging economies risk overheating—means
governments face different challenges.
High debt levels and excessive leverage, which is money borrowed
to finance investments, are evident in a number of advanced
economies—including among (i)banks lacking
adequate capital to absorb losses and poor-quality assets, (ii)
governments facing debt sustainability problems, and (iii)
households whose houses are worth less than their mortgages.
Nearly four years after the start of the global crisis,
confidence in the banking system has yet to be fully restored.
Despite improvements to balance sheets, some banks—particularly in
Europe—remain insufficiently capitalized, and subject to rising
funding costs. To deal with these problems, a comprehensive set of
policies is needed, including
Increased transparency through more
credible, rigorous stress tests
Higher capital buffers
Concrete plans to restructure or resolve
failing banks, where necessary.
Government balance sheets also remain under strain in several
advanced economies. Certain countries in Europe are especially at
risk, as financial market concerns about the sustainability of
public debt have raised funding costs, which in turn is harmful to a
Household indebtedness also remains a key challenge in the United
States and several other advanced economies, in turn posing risks to
bank balance sheets, credit availability, and house prices. The
shadow housing inventory—which represents the potential additional
supply of homes for sale—stands at approximately 6.3m, or 16
months of additional housing supply.
More structural policies, including debt renegotiation or
principal writedowns may be needed to reduce negative equity and the
shadow inventory. IMF analysis shows that banks in the United States
are sufficiently strong to withstand fairly sizeable reductions in
the principal of risky mortgages.
Too much of a good thing
The IMF said the main challenge for emerging economies is to
combat overheating and the accumulation of financial imbalances in
order to maintain financial stability and avoid future crises.
Emerging markets are receiving an increased flow of foreign capital
at a time when their output gaps are closing and inflation rates are
rising. These capital inflows are complicating efforts to manage
local demand through tighter monetary policy and are straining the
absorptive capacity of some local financial markets.
Emerging economies need to rebalance their policy mix by relying
more on economic policies, for example, tighter monetary policies in
a number of countries, while a judicious use of macroprudential
policies, including, in some cases, capital controls, can play a
supportive role in managing capital flows and their effects.