IMF sees global finance stabilizing, lower bank losses (Roundup)

By Chris Cermak Sep 30, 2009, 8:36 GMT

Istanbul - Financial sectors around the world are stabilizing, the International Monetary Fund said Wednesday, as it slashed its forecasts of bank losses for the first time since Wall Street's near collapse just over a year ago.

But the IMF also warned against 'complacency' and urged governments to keep their unprecedented interventions in financial firms in place until a recovery is more assured. Banks, while stable, also still need more capital to revive lending to the wider economy.

In its semi-annual Global Financial Stability Report, the IMF cut its forecast for global writedowns to 3.4 trillion dollars, down from 4 trillion dollars predicted in April. The revision was mainly due to rising prices for the mortgage-backed securities at the heart of the financial crisis.

'This improvement is welcome but we still see significant challenges ahead,' said Jose Vinals, director of the IMF's monetary and capital markets department.

'If we fail to meet the challenges still being faced by the financial system ... we risk reigniting systemic risks and even derailing the economic recovery now in train,' he told reporters.

US financial firms have taken the most losses over the past year but are also further along in recognizing them than their European counterparts, according to the report, which was released ahead of the IMF and World Bank's annual meetings in Istanbul later this week.

Until Wednesday's report, the IMF had been steadily raising its forecast for losses since the collapse of US investment bank Lehman Brothers Holdings last September sent shockwaves through the entire financial industry.

The Wall Street crisis prompted banks to freeze lending to consumers and helped plunge the wider world into its worst recession in seven decades. Governments stepped in to prop up lending by plugging trillions of dollars into struggling financial firms.

While by most accounts a global recovery is now underway, banks have still only recognized about half of their expected losses related to the crisis. The IMF also warned that troubled mortgage assets were not being cleansed fast enough from bank balance sheets.

Banks in the US and Europe also have yet to play a strong role in the economic recovery. The IMF said government help was needed as private sources of funding are still lacking, but politicians should begin to 'consider and articulate' plans to pull out from the sector.

While most banks have raised enough capital to remain afloat, Vinals said they still lack the added 'muscle' that would allow lending to consumers to return to normal.

'If the question is whether banks have enough capital to supply sufficient credit to support the recovery, we believe the answer is no,' Vinals said. 'There is still a substantial need for capital for these purposes.'

The IMF said the US housing market downturn - which sparked Wall Street's crash by exposing banks to massive mortgage-related losses - was also on the brink of ending.

US home prices would fall another 4 per cent and 'bottom out' in 2010, the IMF predicted. Prices have dropped 33 per cent in the US since their peak in mid-2006, prompting a record number of foreclosures by homeowners.