IMF: Confidence in banking system not fully restored

Apr 13, 2011, 13:57 GMT

Washington - Confidence in the banking system has yet to be restored, nearly four years after the start of the global financial crisis, the International Monetary Fund said Wednesday.

Risks to global financial stability have decreased over the past six months, but concerns about government and personal debt continue to weigh on the system in advanced economies, the IMF said in its semi-annual Global Financial Stability Report.

Behind the world's improved economic outlook lie 'serious, underlying vulnerabilities that need to be addressed as quickly as possible,' said Jose Vinals, director of the IMF's monetary and capital markets department.

'In the next few months, the most pressing challenge is the funding of banks and sovereigns, particularly in some vulnerable euro area countries,' the report said.

Advanced economies need to focus on policies that address weak banking assets, national debt and household debt, the IMF said.

It pointed to banks involved in last year's European stress tests, noting 30 per cent of those banks had core capital ratios of less than 8 per cent, making them particularly vulnerable to shocks.

'Advanced economies need to deal with the legacy of the crisis - effectively and immediately,' Vinals said. 'They must reduce their reliance on policies that mainly responded to the symptoms of the crisis, and increase their focus on structural measures that address its underlying causes.'

Upcoming second-round stress tests will provide an important opportunity to assess the health of the system, but must be 'credible, stringent and part of a broader crisis management strategy that includes backstops against capital shortfalls,' Vinals said.

In the United States, continuing household debt remains among the larger problems, with the potential to spill over onto bank balance sheets, credit and housing prices. But national funding challenges like those seen in the euro area are also a risk in both the US and Japan especially if interest rates rise substantially, the IMF noted.

The IMF warned of the risk is of 'overheating' and financial imbalances in emerging economies and called on them to focus on preventing future crises. Of particular concern are bank credit growth, which threatens to bury these countries under underperforming loans. The IMF called for an increase in interest rates, a more flexible exchange rates and caution in state expenditures.

The report was released ahead of a meeting of the IMF and World Bank this weekend and a meeting of finance ministers from the Group of 20 economic powers on Friday.

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