RISKS TO global financial stability have eased as the economic recovery has gained steam, according to a new report by the International Monetary Fund (IMF).
However, high budget deficits in some countries could undermine the return to more stable conditions and prolong the collapse in credit markets, it warned in its latest Global Financial Stability Report.
“Without more fully restoring the health of financial and household balance sheets, a worsening of public debt sustainability could be transmitted back to banking systems or across borders.”
With Greece poised to become the latest state to draw on IMF emergency funds, the Washington-based organisation said yesterday that governments must give details of “credible” medium-term plans to “reduce sovereign vulnerabilities” and introduce stronger regulation of the financial system.
The IMF revised down its estimate of global bank writedowns since the start of the financial crisis – which it describes as “arguably the first global bank run”.
It now estimates that banks have written off $2.3 trillion in toxic loans, compared to a $2.8 trillion estimate made in October 2009, indicating the extent to which stability has returned to the global banking system as a whole.
Government policies around the world needed to focus on the “right sizing” of a vital and sound financial system, the IMF said.
The recent financial crisis underlines the vulnerable position of countries such as Ireland where the banking system is large relative to the size of the economy, a separate strategy report published by the IMF said yesterday.
“Light touch” regulation sparked an aggressive expansion by Icelandic and Irish banks, the report notes.
Banks in these two countries had weaker liquidity buffers than banks in other countries with proportionately large banking systems, such as Switzerland, Hong Kong and Singapore.
A comparison of the banks’ financial ratios suggests that the balance sheets in Icelandic, Irish and Swiss banks were more stretched than those of the Asian banks in the run up to the crisis.
In the absence of strong safeguards, international banks increasingly “banked on the state”, it said.
The IMF suggests that a “transparent way” to manage “a smooth and controlled failure” of insolvent international banks “would lower moral hazard and enhance market discipline”.
A “burden-sharing” system for managing bank failures would also help “limit the exceptionally disruptive effects on economies with large banking systems”.
However, the IMF noted that there are barriers to implementing global or even cross-border plans to rescue banks.
In Ireland, risks to the banks’ funding position and risks to sovereign financial health remained “elevated and strongly correlated” even after the Government announced its plans for the National Asset Management Agency (Nama), the IMF notes.
