WASHINGTON – Unhealthy European banks are the biggest threat to global financial stability, and they need to find fresh capital, the International Monetary Fund said Wednesday.
“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 IMF said in its Global Financial Stability Report.
“Remaining structural weaknesses and vulnerabilities in the euro area still pose significant downside risks if not addressed comprehensively,” it said.
The 187-nation IMF warned of a looming funding challenge for both banks and countries struggling with sovereign debt problems, “particularly in some vulnerable euro area countries.” As a result of the global financial crisis, it said, “banks have sought to raise both quantity and quality of capital, but progress has been uneven, with European banks generally lagging US banks.”
“These low levels of capital make some German banks, as well as weak Italian, Portuguese, and Spanish savings banks, vulnerable to further shocks.” Europe will not escape, IMF economists said, a restructuring of failing banks and a recapitalization of viable banks. “But it is likely that some of the capital will need to come from public sources,” they said.
The Washington-based Fund said financial institutions could build capital by reducing dividend payout ratios and retaining a greater proportion of earnings. Another possible measure would be a gradual downsizing of balance sheets to reduce capital and funding needs. Such moves could help avert fire sales of assets, which would only intensify problems in the global financial system.
“Global banks face a wall of maturing debt, with $3.6 trillion due to mature over the next two years. Bank debt rollover requirements are most acute for Irish and German banks,” the IMF said. “Heavy debt burdens weigh on economic activity and threaten financial stability by making balance sheets more fragile. When debt is at high levels, its sustainability becomes increasingly sensitive to changes in funding costs and rollover rates.”
