IMF: Banks at risk of return to ‘crisis mode’
By Peter Wozniak
The recovery of the financial sector is far from secure, the International Monetary Fund (IMF) has warned, adding that European banks are at risk of needing further support from governments.
The IMF argued in its global financial stability report that the European sovereign debt crisis had increased the risk to banks over the past six months.
José Viñals, director of the IMF’s monetary and capital markets department, warned that economic confidence was failing to return because of uncertainty of the future of the financial sector – calling it the “Achilles’ heel of the recovery”.
“As a result, financial markets remain sensitive to negative surprises, and can quickly shift back to crisis mode,” he added.
The IMF had previously issued a ringing endorsement of the government’s plans to cut spending rapidly.
The warning illustrates that this may not be enough to stave off another crisis in the banks, and will make grim reading for the coalition, which is counting on economic growth and confidence returning by the time of the next election.
The report called for European governments to further bring debt under control and clarify what future regulation of the banking system will entail.
It even suggested that further recapitalisation and bailouts might be necessary:
“Without further bolstering of balance sheets, banking systems remain susceptible to funding shocks that could intensify deleveraging pressures and place a further drag on public finances and the recovery,” it said.
The financial sector is under intense pressure for reform, and key government figures including the prime minister have argued that more stringent measures may be taken if banks fail to increase lending.
An independent commission on the banking sector’s future is set to report next year.
