A DRASTIC contraction of European bank balance sheets over the next 18 months could jeopardise financial stability and economic growth in Europe, according to the International Monetary Fund.
In its Global Financial Stability Report, published yesterday, the fund warned that European banks looked set to shrink their balance sheets by €2 trillion over that period.
The IMF expects most of the deleveraging to come from sales of securities and non-core assets. However, it also sees credit supply shrinking as banks rein in lending to businesses and households, hitting the broader economy.
After examining the efforts of the Continent’s 58 largest banks to boost their capital ratios, shed unprofitable businesses and cut their reliance on wholesale funding, the IMF’s analysts predicted the deleveraging process would be more severe than previously anticipated.
The fund said better policies – such as a consideration of more easing by the European Central Bank and further structural reforms, as well as progress on bank restructuring and resolution – would prompt a smaller contraction in the banks’ balance sheets, which would boost euro area growth by 0.6 per cent.
José Viñals, director of the monetary and capital markets department at the IMF, said: “The key is to recapitalise, restructure and resolve. The important thing is whether the European Stability Mechanism should have the ability to directly take stakes in banks. That is what we are advocating.”
The IMF notes that the degree of deleveraging predicted by the Global Financial Stability Report assessment is “much larger” than that implied by plans submitted to the European Banking Authority as part of the regulator’s efforts to ensure all major European lenders’ high-quality capital buffers amount to at least 9 per cent of assets by the middle of this year.
The EBA identified a collective €115 billion shortfall in December, on the back of which 28 of the region’s most poorly capitalised banks submitted plans on how they would raise their capital ratios. – (Copyright The Financial Times Limited 2012)
